Every bank personal loan in the Philippines is advertised with a monthly "add-on" rate: 1.25% at Metrobank, 1.79% at EastWest, 2% at Security Bank. Somewhere lower on the same page, in smaller type, is a second number: an APR or effective rate of 30%, 39%, 39%. Borrowers assume one of them must be wrong. Neither is. They measure different things, and the gap between them is the single most misunderstood number in Philippine lending.
What "add-on" actually means
An add-on rate is charged on the full original amount for the whole term, as if you never paid any of it back. Borrow ₱100,000 for 12 months at 1.25%:
- Interest = ₱100,000 × 1.25% × 12 = ₱15,000
- Total to repay = ₱115,000
- Monthly = ₱115,000 ÷ 12 = ₱9,583
That arithmetic is simple, which is why banks lead with it. But notice what it ignores: by month six you have already repaid half the principal, yet you are still being charged interest on all of it.
What the effective rate measures
The effective interest rate, also written EIR, APR or ACR (annual contractual rate), asks a fairer question: given what you actually owe each month, what annual rate would produce these payments? Because your balance falls every month while the add-on interest does not, the effective rate comes out at roughly twice the add-on rate annualised.
| Bank | Advertised add-on | Disclosed effective rate | Ratio |
|---|---|---|---|
| Metrobank | 1.25% a month (15% a year) | 30.5% to 33.3% APR | about 2× |
| EastWest | 1.79% a month (21.5% a year) | 39.79% EIR | about 1.9× |
| Security Bank | 2% a month (24% a year) | 39.43% APR at 36 months | about 1.6× |
| BPI | about 1.35% a month, from its example | 28.67% ACR | about 1.8× |
Every figure in that table is from the bank's own website, published on the same page. The ratio varies with the term and with fees, which is the next piece.
Fees push the effective rate up further
Processing fees of ₱1,500 to ₱2,000 are deducted from your loan proceeds, so you receive less than you signed for but repay the full amount. Documentary stamp tax applies above ₱250,000. Neither appears in the add-on rate; both are inside the effective rate. That is why the effective rate is the only number that lets you compare two lenders honestly.
Which number to use when
- To know your monthly payment: the add-on rate. It is what the amortisation schedule is built from.
- To compare lenders: the effective rate, always. Two loans with the same add-on rate can differ by thousands of pesos once fees are counted.
- To check whether a small loan is legal: the effective rate, because the SEC's 12%-a-month ceiling on loans of ₱10,000 or less is written in effective terms. How the cap works.
On Pautang Check, bank rows are computed from the advertised add-on rate plus the published fees, and the row tells you both the monthly payment and the total cost, so you see the effect of the fee without having to do the arithmetic.