Most personal, auto and motorcycle loans in the Philippines are quoted with a "monthly add-on rate" — for example 1.5% per month. It sounds simple, but it is one of the most misunderstood numbers in lending, because the add-on rate is almost always far cheaper-looking than the loan's true cost.
With an add-on rate, the interest is charged on the full original loan amount for the entire term — it does not go down as you pay off the balance. The formula is: total interest = loan amount × monthly add-on rate × number of months. That interest is added to the principal, and the total is split into equal monthly payments.
Worked example: borrow ₱100,000 at a 1.5% monthly add-on rate for 12 months. Interest = ₱100,000 × 1.5% × 12 = ₱18,000. You repay ₱118,000 in total, or about ₱9,833 a month. On the surface that looks like 18% a year (1.5% × 12).
But here's the catch. You only owe the full ₱100,000 in the first month. By the last month you owe almost nothing — yet the add-on method still charges you interest as if the whole ₱100,000 were outstanding the entire year. Because you don't have use of the full amount the whole time, the true cost is much higher than the headline 18%.
That true cost is the effective annual rate (EAR), sometimes shown as the effective interest rate (EIR). For a typical one-year loan, the EAR of an add-on loan works out to roughly double the nominal add-on rate — so our 1.5%/month (18% add-on) example is closer to about 33% a year in real terms. The BSP's Truth in Lending rules require lenders to disclose this effective rate, precisely so borrowers aren't misled by the low-looking monthly figure.
This is why you should never compare loans by the monthly add-on rate alone. A 1.2% add-on over 24 months and a 1.5% add-on over 12 months can cost very differently once fees and term are included. Always compare offers by their EAR — which is shown alongside every offer in the loans table and the auto loans table.
The quickest way to see your real number is the loan calculator: enter your amount and term, and it estimates the monthly payment using the lowest live effective rate for that range. Then check the total you'll repay — principal plus all interest and fees — not just the monthly figure, and borrow only what you can comfortably pay back.