Everyone knows the importance of choosing the right personal loan. But aside from the lender's reputation, what else should you know before getting a personal loan in the Philippines?
You should understand how a personal loan is calculated. The interest and monthly payment are two critical factors that borrowers must consider before applying for a loan.
Of course, it helps to know how much it will cost you to borrow money from a certain lender, and whether you can afford the monthly payment.
How a Personal Loan is Calculated in the Philippines
A personal loan—or any type of loan, for that matter—is calculated by computing the loan's interest or monthly payments (also called amortization or installment). What you should compute depends on the information you need.
For example, to determine how much it will cost to borrow money from a certain lender, you should calculate the interest on the personal loan. The higher the interest you’ll pay, the more expensive borrowing becomes for you.
To determine whether you can afford to repay a loan every month, you should look into the monthly payments. Learning how to compute the monthly amortization lets you know if your monthly budget can cover your loan repayments.
What is Interest on a Personal Loan?
Interest is the fee a lender charges for borrowing money. It's what you pay back each month, in addition to the amount you borrowed.
For the borrower, interest is the cost of borrowing money, while for the lender, it’s the profit earned from granting the loan.
Before learning how personal loan interest is calculated, understand first the factors that affect how much interest you pay: principal, loan term, and interest rate.
- Loan principal is the amount you borrow from the lender. The higher your principal, the higher interest you’ll have to pay.
- Loan term or tenor is how long it will take you to fully repay your loan, usually in months or years. Longer terms lead to lower monthly repayments but higher total interest cost. Conversely, a shorter term leads to higher monthly repayments but less interest payments over time.
- Interest rate is the percentage a lender charges on a loan. Higher rates mean higher borrowing costs.
Read more: 15 Personal Loans with Low Interest Rate in the Philippines
📌 UnionBank Personal Loan
If you want low interest rates for a personal loan in the Philippines, UnionBank is your best bet. UnionBank's Personal Loan only has a 1.29% monthly add-on interest rate and a 26.9% annual contractual rate or the interest charged based on 360 days.
You can borrow as much as ₱2 million even without a collateral or guarantor and pay in long repayment terms of up to five years.
Read more: 19 Personal Loans with Low Interest Rate in the Philippines
How Interest is Calculated on a Personal Loan
An online loan calculator is an easy and precise way to compute interest. But if you’d rather do it manually, here’s the formula[1] that shows how interest is calculated on a personal loan.
Interest = (Annual interest rate ÷ Number of payments) x Loan balance
How to Compute Monthly Loan Interest
- Divide the interest rate (expressed as a decimal) by the number of repayments you’ll make throughout the loan term. For example, if your loan term is two years and you’ll make monthly payments, divide the interest rate by 24.
- Multiply the result by the loan balance. For the first repayment, the loan balance equals the entire principal amount.
- The resulting number is the interest you’ll pay for the current month.
Read more: Fund Your Big Dreams: How to Apply for a UnionBank Personal Loan
Sample Personal Loan Interest Computation
Here’s how to compute loan interest if you’ll get a personal loan with the following features:
- Loan amount: ₱100,000
- Loan term: 24 months
- Interest rate: 10% per annum
Interest on a personal loan: (0.10 ÷ 24) x 100,000 = ₱416.67
For the first month of repaying your loan, ₱416.67 is the amount of interest you’ll be paying
Read more: How to Settle Unpaid Loans With Debt Consolidation in the Philippines
What is the Monthly Amortization on a Personal Loan?
The monthly amortization on a loan (also called monthly payment or installment) is the fixed amount you pay each month on a loan until it's fully repaid. This payment includes both the interest and a portion of the principal amount.
How to Compute Monthly Amortization in the Philippines
If you want to know how to get the monthly amortization on a loan, here’s the formula[2] you can use:
Monthly amortization = a ÷ {[(1 + r)^n]-1} ÷ [r(1+r)^n]
Using the same example above, here are the components of the monthly payment computation:
- a: Loan amount (₱100,000)
- r: Annual interest rate divided by 12 monthly payments per year (0.10 ÷ 12 = 0.0083)
- n: Total number of monthly payments (24)
Monthly loan amortization = 100,000 ÷ {[(1 + 0.0083)^24]-1} ÷ [0.0083(1+0.0083)^24]
Don’t want to bother calculating the monthly payment by hand? Computing the monthly payment on a loan is complicated for anyone who’s not a math whiz. Save time and your sanity by using a personal loan calculator.
Guide to Using a Personal Loan Calculator in the Philippines
When you're looking for a personal loan in the Philippines, a loan calculator is an extremely helpful and convenient tool. It automatically estimates the monthly payments on a loan based on the information you key in. This way, you can make informed decisions before applying for a loan.
How Loan Calculators Work
Loan calculators in the Philippines, which you can find on lenders' websites, allow you to check how much you can borrow based on your monthly income or how much you'll pay off monthly based on your chosen loan amount and term.
Using a loan calculator is easy and quick—you enter information like the amount you want to borrow and your preferred repayment term, and the calculator automatically computes the amount you need to pay every month or the maximum amount you can borrow.
How to Use a Personal Loan Calculator
Want to know how to compute the monthly loan amortization? Go to a lender's website and look for its loan calculator. Computing monthly repayments using a personal loan calculator is simple.
- Enter your preferred loan amount. Ensure it's within the loan amount range the bank or lending company offers.
- Choose a payment term (the number of months you can pay off your loan).
- Click Submit, Compute, or Calculate to generate the monthly amortization.
📌 How to Use the UnionBank Personal Loan Calculator
- Go to this Moneymax page containing the UnionBank personal loan calculator.
- Type your desired loan amount.
- Select or type the preferred payment term, and the calculator will show you the estimated monthly repayment, total repayment, and total interest of your loan.
- Click the dropdown to see more loan details.
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What is a Good Interest Rate on Personal Loans in the Philippines?
With all the loan interest and amortization computations to do on the banks and lending firms mentioned above, the biggest question now is: what is a reasonable interest rate on a personal loan?
Average Interest Rate on Personal Loans in the Philippines
In 2022, the Securities and Exchange Commission (SEC) set a cap on the interest rate of lending companies and other non-bank institutions—up to 6% per month (nominal interest rate) or about 0.6% per day, effective March 3, 2022.[3]
The effective interest rate (EIR) per month is fixed at 15% or 0.5% per day on unsecured and short-term loans amounting to ₱10,000 with a loan tenor of four months.
On the other hand, the Bangko Sentral ng Pilipinas (BSP) cut its key policy interest rate to 6.25% during its August 2024 policy meeting. It also adjusted the interest rates on lending facilities to 6.75%.[4]
Understanding the Annual Percentage Rate (APR)
The annual percentage rate (APR) is the cost of borrowing money for one year, expressed as a percentage of the total loan amount. It includes the interest rate, fees, and other financial charges. These incurred charges are usually used for loan processing.[5]
The APR is the most important consideration when comparing personal loan offers. It determines how much interest you'll pay over the life of the loan. In general, the lower the APR, the better.
If you want to know the actual cost of your credit or loan you're paying throughout the year, you should compare the APRs of personal loans.
What Other Factors Affect the Interest Rate of Your Loan?
When shopping around for a loan, you'll notice that interest rates vary significantly from lender to lender. But what determines the interest rate you'll ultimately be offered?
Here are some other important factors that impact the interest rate of your loan.
👉 Your Credit History
Lenders and banks will check your credit history to gauge how likely you'll repay your loan. Consistently paying your loan amortizations can lead to a lower interest rate. This principle applies to other loan types, like auto and housing loans.
👉 Employment History
Your employment history is crucial for lenders as it demonstrates your ability to make loan payments. A long, uninterrupted employment history indicates stability and may lead to better interest rates.
👉 Income
Your monthly income is significant because it shows lenders how much money you have coming in each month to make your loan payments. The more income you have, the lower your risk of defaulting on the loan, and your interest rate will be lower.
Final Thoughts
Understanding how a personal loan is calculated, including the interest and monthly amortization, is straightforward. You have the bank's online loan calculator at your disposal.
However, note that results from online personal calculators are only estimates. The lender provides the actual computation and final loan amount when you are approved for a personal loan.
Additionally, before getting a loan, remember to only borrow what you can punctually repay without financial strain. Timely repayments maintain a good credit history, eliminate late fees, and free you from the stress of overwhelming debt.
Get a UnionBank Personal Loan Through Moneymax Today!
Finding the right loan for any purpose can be a hassle-free experience when you use an online comparison platform like Moneymax. Want the best option out there? Apply for a UnionBank Personal Loan today!
Sources:
- [1] Calculate interest on loan (Mozo, 2022)
- [2] How to Calculate Monthly Payments for Loans (The Balance, 2022)
- [3] SEC caps interest rates imposed by lending firms (The Philippine Star, 2022)
- [4] Monetary Board Reduces Target RRP Rate by 25 Basis Points (BSP, 2024)
- [5] Annual Percentage Rate (APR): What It Means and How It Works (Investopedia, 2023)
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