Chapter 4
Types Of Bank Loans
One of the ways banks earn money is through the interest that they charge in their loan services. The funds that banks grant as loans to consumers are basically the funds from their clients’ deposits. This is basically one of the primary sources of income for banks, and one of the key pillars of the banking industry.
Housing loan
This is a legal agreement between the financial institution and the borrower, where the financial institution agrees to lend money at a pre-agreed interest rate. In this agreement, the property becomes the collateral of the loan, where if the borrower fails to repay his/her loan, the bank will have the right to seize or foreclose the property.
There are two options for housing loans in the Philippines: PAG-IBIG and bank housing loans.
PAG-IBIG is a financial service offered by the government to Filipinos mainly for home purchases. It provides lower repayment but longer payment terms. On the other hand, bank housing loans aren’t as inclusive as PAG-IBIG. However, banks provide more flexible payment options, can finance almost any properties that you could find, and do not require consistent monthly contributions.
Bank housing loans
Major banks in the country provide housing loans, this includes BPI, BDO, Metrobank, and Security Bank. These banks offer two types of home loans: the conventional and the flexible housing loan.
What is a conventional housing loan?
A conventional housing loan requires a borrower to make fixed monthly payments for a specific term or period. Philippine banks provide eligible customers with home loans that come with tenure up to 20 years for a minimum of ₱500,000. This type of repayment scheme enables a borrower to properly manage his finances because the payments are predictable.
During the early years of the loan, the majority of your monthly payments will be used to repay interest, however, as time passes, a larger proportion of your payments will go into paying down the principal. (refer to fixed interest rates)
Sample Computation
| Property price | ₱2,000,000 |
| Interest rate | 5% per year |
| Term | 20 years |
| Interest per month until end of term | ₱834 |
| Monthly amortization | ₱9,166 |
| Interest incurred | ₱200,000 |
What is a flexible housing loan?
Flexible housing loans or flexi loans are home loans that are tied or linked to a current account. Borrowers can reduce their housing loan interest every time they deposit cash to their current account. Excess payments can also be withdrawn anytime without giving the bank any notice.
Borrowers can also start their principal repayment anytime they want. Because your interest is calculated based on the balance of your loan each month, by paying a little bit extra each month, the interest in subsequent months will be lower.
Interest rates for housing loans in the Philippines differ from bank to bank. For example, for a 20-year period, the interest of a BDO Housing Loan is 5.50% 1-year fixed term, while for Security Bank, it’s 5.25%.
| Interest rate | Margin of finance | Down payment required | Available payment terms |
| 4.99% to 7.70% per year | 70% to 80% | 20% to 30% | 1,2,3,4,5, 10 and 20 years |
In a typical Philippine mortgage, you make monthly payments for the loan tenure until you’ve fully repaid both the principal of the loan and the interest. For the flexi housing loan, the more you pay, the less in interest you’ll be paying in the succeeding months.
Property price – ₱2,000,000
Interest rate – 5%
Term – 5 years
| Interest | Balance | Base yearly | Yearly amortization | |
| 1st year | ₱100,000 | ₱2,100,000 | ₱400,000 | ₱500,000 |
| 2nd year | ₱80,000 | ₱1,680,000 | ₱400,000 | ₱480,000 |
| 3rd year | ₱60,000 | ₱1,200,000 | ₱400,000 | ₱460,000 |
| 4th year | ₱40,000 | ₱840,000 | ₱400,000 | ₱440,000 |
| 5th year | ₱20,000 | ₱420,000 | ₱400,000 | ₱420,000 |
| Interest incurred | ₱300,000 | Total price with interest | ₱2,300,000 |
PAG-IBIG loan
PAG-IBIG Fund is a mutual fund developed for the primary purpose of providing affordable housing programs for the majority of Pinoys. Aside from housing, another goal of the PAG-IBIG Fund is to generate savings. Considering the inflation rate, this option is a practical means of purchasing a property or getting to the money you need during emergencies.
The fund provides home financing options for their members as long as the real estate or the property seller acknowledges PAG-IBIG.
There are two ways for their members to purchase a house through their housing loan service:
- PAG-IBIG acquired assets
- Purchasing a new property from their accredited developers
For someone getting a new loan, there are only three PAG-IBIG loan requirements that you need to meet.
- You need to contribute at least 24 months to PAG-IBIG.
- You need to showcase that you were an active member at the time of loan application. You have to complete at least 5 monthly contributions in the last 6 months.
- The applicant should have a net pay of not less than the minimum requirement of the General Appropriation Act or company policy.
As of July 1, 2017, Pag-IBIG Fund’s End-User Financing Program will come with the following rates:
Personal loans
Personal loans are loans granted for personal use, such as medical emergency, education, or household repairs, as opposed to business or commercial use. Such loans are either unsecured or secured by the asset purchased or by a co-signor (guarantor).
Unsecured loans (called signature loans) are advanced on the basis of the borrower’s credit history and ability to repay the loan from personal income. Repayment is usually through a fixed amount of installments over a fixed term. Personal loans are also called cash loans.
There are two types of cash loans offered by banks: secured and unsecured.
Secured cash loans
Secured loans require collateral; these collaterals have to be valuable assets like a car or a home title. Compared to unsecured loans, secured loans offer much lower interest rates, making it a much-preferred type of loan.
However, the borrower’s assets are at stake if the loan gets defaulted or payments are missed. Just like any other loan, only consider applying for a secured loan if you’re confident that you can sufficiently pay for the repayment every month.
- Must be employed or self-employed
- If employed, must be a regular employee and already employed for at least 1 year with current employer
- Monthly income of at least ₱15,000
- Office or residence landline
- Filipino citizen
Unsecured cash loans
Unsecured loans on the other hand are built on trust based on a credit investigation done on the borrower before a loan is granted. This means banks have little to no hold on a client who avails this type of loan. Repayment also comes with higher interest rates and the payment term isn’t as flexible as secured loans. The longest term for repayment is usually 12 months.
- Must be employed or self-employed
- If employed, must be a regular employee and already employed for at least 1 year with current employer
- Monthly income of at least ₱15,000
- Office or residence landline
- Filipino citizen
Common fees and interest
| Average rate | Payment term | |
| Interest rates | 1.4% to 2.4% per month | 3 months to 3 years |
| Late payment fee | ||
Car loans
A car loan is similar to a secured personal loan, where the proceeds are used to purchase an automobile. The vehicle purchased acts as the collateral for the loan. If the borrower fails to make his or her payments, the vehicle will be repossessed and sold to pay off the loan debt.
A car loan makes car purchases a lot easier and affordable. While it comes with an interest charge, the payments are more manageable if you don’t have a good sum of money to purchase the car in a single payment.
Similar to a home loan, you are required to pay a down payment and have the rest of the amount financed by the bank. The higher your down payment, the less interest you will incur; the shorter your loan period, the lower the interest rates and your monthly repayment will be. Most banks finance 50% to 80% of the car’s full price, requiring the borrower to pay at least 20% to 70% (most of the time covering the entire down payment).
Zero down payment
Zero down payment means paying zero initial payment. However, you will need to pay for the required vehicle registration, insurance, and chattel mortgage. Zero down payment programs are deemed riskier by the banks and may involve a more difficult loan approval process. This scheme is only available during promotional periods from car dealers.
Zero or low downpayment promos come with higher monthly repayment and overall bigger interest than regular car loans. It literally makes some hundred thousand peso difference.
Car loans for used cars
Whether it’s a brand new or a used car, banks can finance your car purchase. However, you might want to think things through if you’re opting for a used car, they might cost less but the interest rates imposed by banks are higher because they’re riskier investments. That is why only a few banks (BPI, RCBC, Security Bank, and Maybank) offer car loans for used cars.
It will ultimately boil down to your financial disposition. Here’s a guide on brand new vs second-hand cars that you can read about.
Interest rates
| Brand new cars | Used cars |
|---|---|
| 5.16% to 6.40% per year | 7% to 8.83% per year |
Price of the car – ₱500,000
Downpayment (upfront payment) – ₱100,000 (20%)
Term – 5 years to finish paying
| Brand new | Used car | |
| Interest rate | 6.40% | 8.83% |
| Interest per year | ₱25,600 / year | ₱35,320 / year |
| Total interest incurred for the entire term | ₱128,000 | ₱176,600 |
Business loan
This loan is meant to cater to the demands for quick cash to cover expenses necessary for a business to operate, like buying new equipment, renovation, or expansion. There are many available resources for entrepreneurs in the Philippines to seek financial assistance for their business.
Here are the types of business loans offered by banks in the Philippines:
Long-term loans
This type of loans offered by banks are mainly limited to the following specific business purposes:
- For project financing
- Expansion/modernization of facilities or acquisition of capital goods or services
- Loan maturities range from 2 to 7 years
Short-term loans
Short-term business loans are easy to avail of since they have a maximum of one-year repayment. A business loan is online considered and approved as a short term loan if they are for the following purposes:
- To finance working capital requirements
- Acquisition of raw materials, supplies, etc.
Trade services and finance
These are also known as trade loans. This type of business loan is for agribusiness entrepreneurs and usually linked to specific import or export transactions. This type of business loan service has various servicing methods, whether open account, collections or documentary credit basis.
- Trade Services
- Letters of Credit (L/Cs)
- Documentary Collections under Open Account, Documents against Acceptance/Payment
- Guarantees in the form of Standby L/Cs
- Collection of Customs Duties and Taxes
- Advisory Services
- Trade Finance
- Import Financing thru LC/TR Lines
- Export Financing thru Export Advance Lines (pre-shipment financing), or Export Bills/Drafts Purchased Lines (post-shipment financing)
- Structured Trade Finance
- Export-Import Bank of United States’ (US-EXIM) Guarantee Program
- Export Credit Agency (ECA) Lines
Loans to local government units
These are loans granted by state-owned banks to local governments that will fund projects benefiting the local community.
- Eligible borrowers: Local governments of provinces, cities and municipalities
- Eligible projects:
- Revenue generating or cost-saving projects
- Projects with a significant socio-economic impact on the community such as public market, infrastructure, machinery, and equipment, etc.
The small business loan program
This is the most basic type of business loan and is available to any business owner.
- To finance business expenditures or expansion
- Eligible borrowers: those engaged in light manufacturing, processing, services and retail/wholesale trade
- Favorable track record/experience and credit standing for the past three (3) years
- Minimum of ₱1.0 Million up to ₱10 Million loanable amount
- Term Loans (TL) and Domestic Bills Purchase Line (DBPL)
- The minimum tenure of one (1) year to a maximum of five (5) years
Pondo sa Pagbabago at Pag-asenso (P3) Duterte implemented an initiative to abolish loan sharks (5-6) that provide quick loans to small and medium enterprises but imposes high-interest rates. This program is tasked to specifically provide financial assistance in a form of loans to small business owners in the country to impede unregulated lending practices in the country. It can be availed through DTI.
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