5 Effective Strategies for Borrowers to Avoid Loan Delinquency

As of April 2024, the loan delinquency rate in the Philippines has gone up to 4.43%, coming from 4.30% the previous month and 4.13% the previous year, according to the Bangko Sentral ng Pilipinas (BSP).^[1] 

As more and more Filipinos avail of consumer loans ^[2]—possibly due to the rising cost of goods, post-pandemic revenge spending, and other factors—it seems more and more might end up falling into a debt trap.

So, what exactly is the meaning of a delinquent loan? What are its repercussions? And how can both existing and potential borrowers avoid it? Read on to learn more. 

What is the Meaning of Loan Delinquency?

What is loan delinquency? Also called a loan default in the Philippines, it refers to a borrower’s failure to make scheduled loan payments by the due date. As per Republic Act No. (R.A.) 10870, default or delinquency refers to the “nonpayment of, or payment of an amount less than, the minimum amount due or minimum payment required… for at least three billing cycles.” ^[3]

What Happens if You’re a Loan Delinquent?

Say you take out a loan, but due to various reasons—perhaps a financial emergency, income loss, poor planning, or lack of money management skills—find that you’re ill-equipped to make timely payments. What happens next? 

👉 You will be Charged Compounded Interest and Penalties 

The most immediate consequence of loan delinquency is the accumulated fees and charges. As you miss payment after payment, your lender will continuously charge late payment fees. The interest rate on your outstanding balance will also compound, adding to your already ballooning financial burden. 

Missed payments lead to bigger debt, making it even more challenging for you to catch up. It’s a vicious cycle.

👉 You will Have a Bad Credit Score

Wondering if you can still get a loan even with a delinquent account? 

Over time, loan delinquency will affect your credit history and damage your credit score. If your credit score is in the red, you’ll find it difficult to get approved for other financial products and services—such as personal loans, credit cards, home loans, or car loans—in the future. You’ll be flagged as a high-risk borrower, which can result in higher interest rates or even outright rejections.

In turn, this limits your ability to achieve long-term financial goals, such as buying a home for your growing family or getting a car for your TNVS business. 

👉 Your Lender may File a Civil Case

According to Article III, Section 20 of the 1987 Constitution, “no person shall be imprisoned for debt.” ^[4]

However, this doesn’t mean loan delinquents won’t face any legal repercussions. Lenders or financial institutions can file civil cases against borrowers to collect the amount owed. In the case of secured loans, the lender will seize their assets (e.g., a house or a car).

👉 You may Experience a Reduced Quality of Life

Aside from financial repercussions, loan delinquency may also take a toll on the borrower’s mental and emotional well-being. Fielding aggressive calls from debt collection agencies is just the tip of the iceberg—you might strain your interpersonal relationships and lose focus at work. The irony is that you need both emotional support and a reliable salary during this time, so you can’t afford to lose either.

All this pressure can lead to anxiety, depression, and other mental health issues. In short, your overall quality of life will take a hit. 

Read more: What Should I Do in Case of Non-Payment of Loans in the Philippines?

How to Avoid Loan Delinquency in 5 Steps

It’s impossible for most Filipinos to swear loans off completely—after all, how else can one achieve their big life goals? 

Don’t be afraid to get a loan if you really need it. Just follow these steps to ensure you don’t become a loan delinquent:

👉 Step 1: Determine if You Can Actually Afford a Loan

Before anything else, assess your financial situation. List your income and expenses, and then determine if you can comfortably add loan payments into the mix given your remaining budget. Be realistic about your current financial status and the loan amount you can afford.

Check if your preferred lender has a personal loan calculator on its website. UnionBank, for instance, shows sample computations for various loan amounts and loan terms on its website:^[5]

This way, you can get a clear estimate of your monthly loan payments. You don’t want to end up with bill shock when your first due date arrives.

👉 Step 2: Build Your Emergency Fund

You need to factor in potential changes in income or expenses. So, before you take out a loan, make sure to create an emergency fund worth at least six times your current monthly salary. 

In case of job loss, unexpected medical expenses, or anything untoward, you can use this fund instead of dipping into your precious savings. This financial cushion can cover unexpected expenses and help tide you over until you get back on your feet. 

👉 Step 3: Make Sure You Understand the Loan Terms

All that financial jargon on a loan contract can be overwhelming and intimidating. Read up on terms you don’t understand, such as annual percentage rate, collateral, maturity, principal, and more. 

Understanding these terms is key to computing the total cost of your loan. After all, you have to pay not just the principal and interest—you also have to consider the processing fee, early and late payment fees, disbursement fee, and other fees and charges. 

This way, you know and understand what you’re actually signing up for. You can also be more mindful of any penalties and avoid them. 

If you still find it difficult to understand how certain things work, consult your lender. Ask them to thoroughly explain the foreign concepts to you. 

👉 Step 4: Maintain Good Payment Habits

To manage your debt effectively, track where your money goes. You can then easily trim unnecessary expenses and allot more budget toward loan payments. Create a budget and stick to it as much as possible.

To make timely payments and prevent any accidentally-missed due dates, set reminders on your phone or Google Calendar. For more convenience, you can also set up an automatic debit arrangement with your lender. Just make sure your account contains enough balance to cover your loan payment before the due date. 

👉 Step 5: Talk to Your Lender

If you’ve followed all the strategies above but still find it hard to make timely payments, simply let your lender know ASAP. Don’t hesitate to tell them you’re having difficulties. They may offer various solutions: an extension until you can pay them back, partial payments until you can pay in full, or a loan restructuring so you can get more favorable terms. 

You can also opt to refinance your loan with one from a new lender—preferably with lower interest rates and lower monthly payments. If you have multiple outstanding loans, consider simplifying your payments and combining them all into one loan via debt consolidation. 

Related:

• How to Get Out of Debt Fast With Low Income in 6 Steps
• Drowning in Debt? Here’s How to Pay it Off

Final Thoughts 

Now that you know the meaning of a delinquent loan and its possible consequences, make sure you know the ins and outs of proper financial planning before you send an application. With this, plus open communication with your lender, you can better manage your debts and avoid the pitfalls of loan delinquency. 

After repaying a loan, focus on building and maintaining a healthy credit history. This way, you’re better prepared for even bigger financial opportunities in the future.

DISCLAIMER: This article was created in partnership with UnionBank of the Philippines. While we are financially compensated for this collaboration, we ensure to maintain our editorial integrity to provide you with the best recommendations that can help you make smarter financial decisions.

Sources:

• ^[1] Philippine loan delinquencies climb as NPL ratio hits 2024 peak (Bilyonaryo, 2024)
• ^[2] BSP: Bank lending growth surged to 14-month high in May (Inquirer, 2024)
• ^[3] RA 10870 (Congress of the Philippines)
• ^[4] 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES (Lawphil)
• ^[5] UnionBank Personal Loan