The cost of borrowing

THE COST of borrowing is a vexed question which has not been answered satisfactorily. Part of the problem arises from the fact that the borrower may be in difficult circumstances and therefore is prepared to accept any offer to be lent money. This, of course, engenders the problem of predatory lending practices. As a result the Securities and Exchange Commission (SEC) has asked the Bangko Sentral ng Pilipinas (BSP) to prescribe the maximum interest rates, fees and other charges that lending companies may impose on borrowers.

This is a problem that is easily stated but which is difficult to answer.

I believe that the lender should be instructed, either by BSP or by law, to quote an accurate annual percentage rate of charge (APR) on the loan.

For example, if the loan is to be repaid at two percent per month, then the annual rate of charge in 26.82 percent. This is due to the compounding effect of the monthly interest rate.

The calculations are made more difficult when there are upfront fees. For example, if the loan is subject to a fee of five percent ‘to cover administrative costs’ for example and the loan is to be repaid at two percent per month, then the annual rate of charge rises from 26.82 percent to 33.48 percent. The mathematics required to do the calculation is tricky but it should be done. Otherwise the borrower is unable to compare one loan possibility with another.

Nevertheless I concur with SEC in that it is desirable that there should be a cap to the annual percentage rate of charge.


More importantly, however, I believe that the APR should be calculated and made known to the prospective borrower.

For example, Cebu Pacific recently announced a ‘fly now pay later’ scheme, but it was not clear what the APR would be. In the interest of transparency, I believe it should be.

Another example I find troubling is that many teachers are reported to take loans to be repaid from future salary payments. It was reported that many teachers who commit to these loans are only receiving P5,000 per month. The remainder of their salary is used to liquefy their indebtedness to the lender.

Who is the lender?

Given that teachers who take these loans are receiving P5,000 per month, it sounds as though the lender could be a group within the Department of Education (DepEd). If so what is the APR for these loans?


The overall lending environment is unsatisfactory.

I hope BSP is able to be firmer with banks about lending policies.

We need clear directions from BSP to banks to which the banks must adhere.

We need lending rates to be quantified and for the APR to appear in all advertisements dealing with loans.

Pie in the sky?
I hope not./PN


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