Question: I am about to take on a personal loan. Are there things I should focus on before signing my loan agreement and promissory note? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook
Answer: According to Republic Act No. 3765, otherwise known as the Truth in Lending Act, a creditor must disclose the following prior to the consummation of any loan it extends:
1. The cash price or delivered price of the property or service to be acquired
2. The amounts, if any, to be credited as down payment and/or trade-in
3. The difference between the amounts in items 1 and 2
4. The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction, but which are not incident to the extension of credit
5. The total amount to be financed
6. The finance charge expressed in terms of pesos and centavos
7. The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
In addition, Bangko Sentral ng Pilipinas (BSP) Memorandum M-2008-020 stipulated, among others, that creditors should place in conspicuous places in their businesses the following:
1. An abstract of the provisions of RA 3765
2. Information regarding interest and other charges on loans such as: type of loan, simple annual rate of interest, manner of interest payment whether collected in advance or otherwise, and other fees and charges imposed by the bank in connection with the loan.
Finally, BSP Circular No. 730 clarifies that simple annual rate is the uniform percentage, which represents the ratio between the finance charge and the amount to be financed assuming the loan is payable in one year in one payment upon loan maturity and that there are no upfront deductions to the loan principal. Furthermore, for loans that are not fully settled in one payment in a year, the effective annual interest rate shall be calculated and disclosed to the borrower as the true cost of the loan. That effective interest rate according to Philippine Accounting Standards is the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds.
The most important part of these regulations is the effective interest rate, the true cost of the loan. We have an EnRich GOOD (i.e. Getting Out of Debt) client who borrowed against her pension. Her loan not only had upfront loan processing and collection fees but also offset the first three monthly loan amortizations against the loan proceeds. When we computed her effective loan interest rate, it amounted to 81 percent a year. How can a pensioner possibly afford such a high interest rate? In fact, how can anyone afford such a prohibitive rate of interest. Yet, the material information was never disclosed to her prior to or even after her getting the loan.
And this is the worst part. When our client wanted to prepay her loan, the creditor said that she will still need to pay her remaining amortizations. This practice is in direct contradiction of Article 137 of the Consumer Act of the Philippines, which states that, “The person to whom credit is extended may prepay in full or in part, at any time without penalty, the unpaid balance of any consumer credit transaction.”
In addition, Article 138 of the same act states that, “Upon prepayment in full of the unpaid balance of a precomputed consumer credit transaction, refinancing or consolidation, an amount not less than the unearned portion of the finance charge calculated according to this Article shall be rebated to the person to whom credit is extended.”
Do not be afraid to ask your creditor about these provisions before you sign on the dotted line.
Stay safe and healthy, both physically and financially. INQ
Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Join our Yaman Coach Free Webinar series. For details, email yaman@personalfinance.ph. To learn more about personal financial planning, attend the 86th RFP Program this November 2020. To inquire, e-mail info@rfp.ph or text at 09176248110