Interest Rates, EIR and Loan Fees Explained (with Peso Examples)

"3% per month" sounds simple. Two loans can both say it and still cost very different amounts, depending on how the interest is counted, which fees come off the top and how long you borrow for.

Below are the terms you'll run into on Philippine loan offers and disclosure statements, each with a peso example you can check on your phone's calculator.

Kung ang tanong mo ay "magkano talaga ang tubo?", ito ang gabay para sa iyo. Every example below is labelled as an example. The numbers on your own disclosure statement are the ones that count.

The words you'll see

• Principal: the amount you borrow.
• Net proceeds: the amount you actually receive after any deductions.
• Nominal interest rate: the stated rate, e.g. "2.5% per month".
• Add-on interest: interest calculated on the original principal for the whole term, even as you pay it down.
• Diminishing balance interest: interest calculated only on the remaining balance each period.
• Fees: processing, service, disbursement, documentary stamp tax, insurance, late payment and other charges.
• Finance charge: the total of interest and fees you pay to borrow.
• Effective interest rate (EIR): the true rate that reflects the timing of payments and all finance charges, based on what you actually received.

Add-on vs diminishing balance

Let's borrow ₱10,000 for 3 months at "3% per month", repaid in three equal monthly installments.

Add-on interest

Interest = ₱10,000 × 3% × 3 months = ₱900.

Total to repay = ₱10,900, or about ₱3,633.33 per month.

You pay down part of the principal every month, yet you're charged interest as if you still owed the full ₱10,000 for all three.

Diminishing balance

Interest is charged only on what you still owe. Using a standard amortization formula, the monthly payment is about ₱3,535.30, and the total repaid is about ₱10,605.91. That's roughly ₱294 less than the add-on loan with the same "3%".

The add-on loan's effective rate works out to roughly 4.4% per month, not 3%.

Why "1.5% a month" can cost more than "2.5% a month"

The add-on gap gets bigger on longer loans. Here's an example with two made-up bank-style offers for ₱100,000 over 24 months:

Offer A: 1.5% a month, add-on

• Interest: ₱100,000 × 1.5% × 24 = ₱36,000
• Monthly payment: ₱136,000 ÷ 24 = about ₱5,667
• Total repaid: ₱136,000

Offer B: 2.5% a month, diminishing balance

• Monthly payment (standard amortization): about ₱5,591
• Total repaid: about ₱134,191

Offer A looks cheaper because 1.5 is smaller than 2.5. Offer B still costs about ₱1,800 less in total, and Offer A's effective rate is about 2.6% a month. So the stated rate on its own tells you very little. Ask which method the lender uses, then compare the totals.

How deducted fees raise the real cost

Now add a 3% processing fee deducted upfront to the add-on loan. You still owe ₱10,900, but you only receive ₱9,700.

Your effective rate is now about 6.1% per month, roughly double the advertised "3% per month". Over a year, that's above 70%.

Two questions cut through all of this: How much will land in my account, and how much will I pay back in total?

What is EIR and why it matters

The effective interest rate (EIR) converts all the costs and the payment schedule into a single comparable rate, based on the money you actually received. It answers the question: "If this were a simple diminishing-balance loan with no fees, what rate would produce the same payments?"

Under the Truth in Lending Act (RA 3765) and related regulations, lenders have to disclose finance charges before the loan is finalised, usually in a disclosure statement. Many Philippine lenders show the EIR or an annual percentage rate (APR) on that statement or on their website. Use it to compare offers with different structures.

When EIR isn't shown, you can still compare using the total amount to repay for the same principal and term. The lower total is cheaper.

How to work out the EIR yourself

You don't need a finance degree. Google Sheets and Excel have a RATE function that does it in one line, as long as the payments are equal:

1. Open a blank sheet.
2. Type `=RATE(number of payments, -payment, amount received)`.
3. Format the result as a percentage. That's the effective rate per payment period.

Using the add-on loan with the 3% deducted fee from above: `=RATE(3, -3633.33, 9700)` gives about 6.1% per month. Without the fee, `=RATE(3, -3633.33, 10000)` gives about 4.4%. Same loan, same "3%", and the fee alone adds about 1.6 percentage points a month.

Two tips:

• Use the amount you actually receive, not the loan amount. That's where deducted fees show up.
• If payments are every kinsenas, the result is per half-month. Multiply by 2 for a rough monthly figure, or by 24 for a rough yearly one.

Monthly rate vs yearly rate

A monthly rate times 12 gives a simple yearly figure: 3% a month is 36% a year. If interest compounds, the real yearly figure is higher, about 42.6% for 3% a month. Some lenders show an annual percentage rate (APR), others show a monthly rate, and SSS and Pag-IBIG quote yearly rates on a diminishing balance. Convert everything to the same period before you compare.

Short-term online loans: daily rates add up

Many online lending apps quote daily rates or flat fees for 7-, 14- or 30-day loans. A small daily rate can look harmless, but it compounds into a large annual figure. A rate of 0.5% per day is roughly 15% per month. That's far more expensive than most bank loans, and above the 12% a month all-in ceiling for small app loans since April 2026.

A short loan can be fine for a real short gap, like three days before sweldo, if you repay on time. The trouble starts when you roll it over or borrow from one app to pay another.

Example: a ₱3,000 loan for 14 days at 0.5% a day costs ₱3,000 × 0.5% × 14 = ₱210 in interest. That sounds small. But if you can't pay and you extend it for another 14 days with a new fee, you've now paid for a month of borrowing and still owe the ₱3,000. Do that three times and the fees can pass ₱600, before any late penalty.

Interest rate caps on small loans

The SEC caps interest and fees on small, short-term, unsecured loans from lending and financing companies. The first ceilings came in SEC Memorandum Circular No. 3, series of 2022, which implemented BSP Circular No. 1133, series of 2021. The current ones are in SEC Memorandum Circular No. 14, s. 2025, for loans entered into, restructured or renewed from 1 April 2026 (as reported by the Philippine Star (opens in new tab) and BusinessWorld (opens in new tab)). At the time of writing, these rules cover loans of ₱10,000 and below with terms of up to four months. Banks and credit cards have separate BSP rules.

Example: on a ₱6,000 loan covered by these rules, all interest, fees and penalties together can never go above ₱6,000, even if you're very late. So the most you could ever owe on it is ₱12,000. That's a ceiling, not a target. A good loan costs far less. For a full list of SEC-checked apps and the caps worked through in pesos, see legit loan apps in the Philippines.

Caps can change, so check the latest SEC memorandum circulars at sec.gov.ph. If a lender's charges on a small loan seem far above these limits, ask the lender to explain and consider reporting it.

Common fees to look for

Does paying early save money?

It depends on how interest is charged. Ask before you sign.

• Diminishing balance: paying early usually saves interest, because interest is only charged on what you still owe. SSS, for example, lets you settle a Salary Loan early by paying the outstanding balance of penalty, interest and principal as of the settlement date.
• Add-on interest: the interest for the whole term may already be built into your total. Some lenders give a rebate of unearned interest if you pay early, some don't, and some charge a pre-termination fee.
• Deducted fees: a processing fee taken upfront is usually not refunded when you pay early.

Example: on the ₱10,000, 3-month add-on loan above, the total interest is ₱900. If you pay it all off after one month and the lender has no rebate, you still pay the full ₱900. With a rebate, you might pay only the first month's share. Ask the lender to show you the payoff amount in writing.

A simple comparison method

For each loan offer, write down:

1. Amount you'll receive (net proceeds).
2. Total amount you'll repay.
3. Number of days or months until fully paid.
4. Finance charge = total repaid minus net proceeds.

Then compare the finance charge for the same amount and similar term. If the terms differ, use the EIR or APR from the disclosure statement.

Questions to ask any lender

• Is the interest add-on or diminishing balance?
• What fees are deducted from my proceeds?
• What is the EIR or APR?
• What is the total amount I will repay?
• What exactly happens if I pay late?
• Can I pay early, and will I save on interest if I do?

A lender that can't answer these in plain words isn't one to borrow from. The step-by-step method is in how to compare personal loans in the Philippines, and registered lenders are on our comparison page. Juggling several expensive debts? See the refinance page. If the need is urgent, the emergency loan guide lists cheaper options to try first, and the loan matcher can shortlist lenders for your amount.

Frequently asked questions

What is the difference between add-on and diminishing-balance interest?

Add-on interest is charged on the original principal for the whole term. Diminishing-balance interest is charged only on what you still owe, so it costs less at the same stated rate.

What is EIR?

The effective interest rate reflects the timing of payments and all finance charges, based on the amount you actually received. It lets you compare loans with different structures.

Are there interest caps on small online loans?

Yes. SEC Memorandum Circular No. 3, s. 2022 sets ceilings on interest and fees for small, short-term unsecured loans from lending and financing companies. Check sec.gov.ph for the latest rules.

How do I compute the effective interest rate on my phone?

Open Google Sheets and type `=RATE(number of payments, -payment amount, amount you received)`. The result is the effective rate per payment period. Use the amount that actually reached your account, so deducted fees are counted.

Is 0.5% a day expensive?

Yes. It's about 15% a month. That was the old all-in ceiling for small, short loans from lending and financing companies, but since 1 April 2026 the ceiling is 12% a month (about 0.4% a day), so 0.5% a day is now above the legal limit for covered loans. It's far above typical bank or SSS rates.

Ano ang mas mura: add-on o diminishing balance?

Sa parehong rate at term, mas mura ang diminishing balance, dahil ang interes ay sa natitirang utang lang kinukuwenta. Sa add-on, buong principal ang basehan ng interes hanggang matapos ang loan. Kaya kapag magkaiba ang paraan, ikumpara ang kabuuang babayaran, hindi ang rate.

Magkano talaga ang tubo ng loan ko?

Huwag lang tingnan ang monthly rate. Kunin ang disclosure statement, ibawas ang halagang natanggap mo sa kabuuang babayaran mo, at iyon ang tunay mong gastos sa interes at fees. Kung may ibinawas na fee bago ma-release ang pera, mas mataas ang tunay na tubo kaysa sa nakasulat.