Interest rates on loans: how to read them and what to compare

Loan advertising usually shows the smallest number available — often a rate per month, or a daily amount. Neither tells you what the loan costs. What matters is the total you repay and how it compares with the alternatives.

What lenders must disclose

Under the Truth in Lending Act (Republic Act No. 3765), lenders must give borrowers a written disclosure statement before the transaction is completed. It has to state the amount financed, the finance charges, and the effective interest rate — in figures you can check.

If you are not given a disclosure statement, ask for one. A lender that will not put the cost in writing is telling you something useful.

Monthly rates are not small

A rate presented as a small monthly percentage compounds into a much larger annual figure. Five percent per month is not five percent per year — it is roughly sixty percent before compounding, and more with it.

Whenever you see a monthly or daily rate, convert it to an annual basis before comparing. Otherwise you are comparing a monthly number from one lender with an annual number from another, which always flatters the first.

Add-on rates

Some loans quote an add-on rate: interest is computed on the full original amount for the whole term, then divided across the instalments. The catch is that you are paying interest on the entire principal even in the final months, when most of it has already been repaid.

The effective rate on an add-on loan is therefore considerably higher than the quoted rate — often close to double. This is one reason the disclosure statement matters: it should show the effective rate, not just the quoted one.

Fees and deductions

Ask specifically what is deducted before the money reaches you. Processing fees, service charges, documentary stamp tax and insurance are commonly netted out of the release.

If you are approved for ₱10,000 and receive ₱8,500, your cost of borrowing is based on the ₱8,500 you actually got, while interest may be computed on ₱10,000. Always ask for two figures in writing: the amount released to you, and the total amount you will repay.

Three numbers to compare

1. Net proceeds — what reaches your account after all deductions.
2. Total amount repayable — the sum of every payment to the end of the term.
3. Effective interest rate — the annualised cost, from the disclosure statement.

Compare loans of the same amount and the same term. A longer term lowers the instalment and raises the total; a shorter term does the reverse. Comparing instalments alone is how expensive loans end up looking cheap.

Late payment charges

Ask what happens if a payment is late, and get the answer in writing before signing. Penalties can include a late fee, a penalty rate on the overdue amount, and in some agreements an acceleration clause making the whole balance due at once.

These charges are not part of the advertised rate, and they are where a manageable loan most often becomes unmanageable. If the agreement does not state them clearly, ask — and if the lender will not say, that is a reason to look elsewhere.