Loan prepayment penalties

Question: Why is it that some lenders charge penalties for prepaying consumer loans when you are merely returning their money early? (A question posed at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.)

Answer: The issue you raised is indeed perplexing because Article 137 of Republic Act No. 7394, otherwise known as the Consumer Act of the Philippines, 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.”

To shed further light on the matter, Article 4 of the same law gives the following definitions (reproduced verbatim):

(Section n) “Consumer” means a natural person who is a purchaser, lessee, recipient or prospective purchaser, lessor or recipient of consumer products, services or credit.
(Section o) “Consumer credit” means any credit extended by a creditor to a consumer for the sale or lease of any consumer product or service under which part or all of the price or payment therefore is payable at some future time, whether in full or in installments.
(Section p) “Consumer loan” means a loan made by the lender to a person which is payable in installment for which a finance charge is or may be imposed. This term includes credit transactions pursuant to an open-end-credit plan other than a seller credit card.
(Section q) “Consumer products and services” means goods, services and credits, debts or obligations which are primarily for personal, family, household or agricultural purposes, which shall include but not limited to, food, drugs, cosmetics and devices.

Volume I of the Bangko Sentral ng Pilipinas’ (BSP) Handbook on Consumer Laws Covering BSP-Supervised Financial Institutions also echoes the foregoing provision of the law.

So, why then do some lenders still charge penalties for prepaying consumer loans? Is that not illegal?

Apparently, the practice is legal because of a loophole in the law. And believe it or not, the loophole is that lenders do not describe the charges for prepaying loans as penalties. They simply call them loan processing fees.

So, here is what you need to do the next time you apply for a consumer loan. Ask the lender if they charge loan processing fees for prepaying outstanding consumer loan balances. If they do, make it known to them that you are one of the growing number of consumers who know your rights better and that you will just move to another lender who does not charge loan prepayment processing fees.

Hopefully, if more and more consumers assert their rights, the lenders will finally cave in and do away with loan prepayment processing fees.

Borrow responsibly and wisely.