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Effective Interest Rate vs Add-On Rate in the Philippines
Two lenders can both say "3% per month" and still charge you very different amounts. The reason is how that 3% is calculated. One lender may apply it to the full amount you borrowed for the entire term. Another may apply it only to what you still owe. The effective interest rate (EIR) lets you compare these loans fairly.
This page explains EIR and add-on rate, why the same quoted rate can cost different amounts, and how to read the figures in your loan disclosure. It is part of our guide to loan interest and costs in the Philippines.
What Is the Effective Interest Rate (EIR)?
The effective interest rate measures what a loan really costs you. The Bangko Sentral ng Pilipinas (BSP) states that the EIR reflects the true cost of a loan, and BSP's disclosure rules describe it as the rate that ties the payments you will make to the net proceeds you actually receive. It looks at how much cash you actually get, how much you pay and when, and how the interest is charged. That is why it lets you compare a loan with a low rate and high fees against one with a higher rate and no fees.
What Is an Add-On Rate?
An add-on rate applies interest to the original loan amount for the whole term. For example, borrow ₱10,000 for 4 months at a 3% monthly add-on rate: interest is 3% × ₱10,000 × 4 = ₱1,200, the total to repay is ₱11,200, and the monthly payment is ₱2,800. Every payment reduces what you owe, but interest is still computed as if you owed the full ₱10,000 the entire time. That is why an add-on rate usually costs more than it looks.
Why the Same Rate Can Cost Different Amounts
The table compares three hypothetical ₱10,000 loans over 4 months with equal monthly payments. The EIR figures are our own approximate calculations.
| Loan 1: Add-on | Loan 2: Diminishing balance | Loan 3: Add-on plus upfront fee | |
|---|---|---|---|
| Quoted rate | 3% per month | 3% per month | 3% per month |
| Upfront fee | None | None | ₱500 (5%), deducted |
| Net proceeds | ₱10,000 | ₱10,000 | ₱9,500 |
| Monthly payment | ₱2,800 | about ₱2,690.27 | ₱2,800 |
| Total repayment | ₱11,200 | about ₱10,761.08 | ₱11,200 |
| Total cost | ₱1,200 | about ₱761.08 | ₱1,700 |
| Approx. EIR per month | about 4.7% | about 3.0% | about 6.9% |
All three advertise "3% per month," yet the true monthly cost ranges from about 3.0% to about 6.9%. This is why our overview of loan interest and costs tells borrowers to compare net proceeds and total repayment, not just the quoted rate.
Monthly, Annual, Flat and Diminishing Balance: Common Terms Explained
Monthly rate: interest per month, such as 3%. Annual rate: interest per year; 3% monthly is roughly 36% a year before compounding or fees. Flat or add-on rate: interest on the original amount for the whole term. Diminishing balance: interest on the remaining balance, so the interest portion falls as you pay. Nominal rate: the stated rate before fees. The SEC uses both nominal and effective rates in its ceilings for small loans, which shows the two are not interchangeable. Effective interest rate: the all-in measure of true cost.
How to Read the EIR in Your Loan Disclosure
Under the Truth in Lending Act (Republic Act No. 3765), the finance charge must be disclosed in pesos and centavos. BSP's rules for banks require the disclosure statement to show the finance charges, the net proceeds, and the finance charge as a simple annual rate or an EIR, with a copy given before the transaction is completed. Look for the net proceeds, the finance charge in pesos, the rate and how it is labelled, the repayment schedule, and the total repayment. If the EIR is not shown, ask for it, or estimate it with the BSP loan calculator, which the BSP says is for illustration only.
Common Mistakes When Reading Interest Rates
- Comparing a monthly rate to an annual rate.
- Ignoring how the rate is applied: a 2% add-on can cost more than a 3% rate on a diminishing balance.
- Forgetting upfront deductions, so comparing loan amounts instead of net proceeds.
- Comparing loans with different terms.
- Treating "0% interest" as "no cost," since fees can still apply.
For a full method, see how to compare loan costs, and for charges beyond the rate, read loan interest vs fees.
Where EIR Fits in the Bigger Picture
EIR is one of several things to check, together with fees, total repayment and whether the lender is authorized to operate. When you are ready to compare providers, start with our list of low-interest loan apps in the Philippines and apply the EIR test to each offer. To run your own numbers, use our guide to calculate your total loan repayment.
FAQs
What is a good EIR?
There is no single number that is good for every loan. It depends on the type of loan, amount, term and lender. Compare the EIR of offers with the same amount and term, and check whether a regulatory ceiling applies, such as the SEC ceilings for certain small, short-term loans.
Is EIR the same as APR?
Not exactly. An annual percentage rate is often the periodic rate multiplied by periods per year. The EIR also takes into account net proceeds, fees and payment timing. In Philippine loan documents, look for the EIR or ask the lender for it.
Does a lower monthly rate always mean a lower EIR?
No. On the same ₱10,000, 4-month example, a 2% monthly add-on rate has an EIR of about 3.15% per month, slightly higher than a 3% rate on a diminishing balance (about 3.0%).
Who must disclose the EIR?
Banks supervised by the BSP must give a disclosure statement showing the finance charge and either a simple annual rate or the EIR. Other lenders are covered by the Truth in Lending Act and by SEC rules where applicable. You can ask any lender for the full cost in writing.
Written and maintained by Marissa Dela Cruz, Editor
Marissa researches and maintains every guide on Loan Low Interest, from loan costs and the effective interest rate to eligibility, repayment and borrower safety. She works from primary sources: Philippine laws such as the Truth in Lending Act and the Data Privacy Act, circulars and guidance from the SEC and the BSP, and each provider's own published terms and disclosure statements.
Loan costs and disclosure rulesEligibility and requirementsRepayment and late feesLender verification and safety
Every page follows our editorial policy and is rechecked when rules or terms change. See her full profile and guides.
For information only. This page is not financial or legal advice. Rules, rates and procedures change, so confirm current details with the lender and the relevant government agency.