Find Yourself A Loan

September 18, 2014

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Written by imoney

Sometimes, you need extra money for emergencies, tuition fees, or even extraordinary events, like a wedding or a vacation. If you’ve ever been in this situation, you’ve probably thought about getting a loan. There are several no-collateral (meaning: you don’t put up jewellery or your house or your car as a collateral that the lender can repossess if you don’t pay back) loans you can get from different sources.

How do you choose which one suits your needs? Below, we’ve gone through four kinds of no-collateral loans available in the Philippines: bank personal loans, social microfinancing, salary loans, and informal loans. By detailing their pros and cons, we give you a bigger picture and help you make the right decision.

Personal Loans

For those wanting to fund a big expense or consolidate debt, bank personal loans can be the first thing that comes to mind. Unlike auto or home loans, you can use personal loans for anything you need, like a wedding, or a vacation, or to fund your children’s education. The low interest rate of personal loans when compared to credit cards can make it a good choice for these big, one-time expenses.

Also, if you have a lot of credit card debt, you can convert that debt into a personal loan, which means you pay less interest (around 11% annually for loans instead of 13%-15.4% on credit cards) while still building a good credit score — but this only works if you stop using your credit cards or make sure you pay all the expenses you charge to it.

Before taking out a personal loan from a bank, make sure that you will be able to keep up with repayments, and be aware of all the fees included. As a rule, keep your monthly installment under 30% of your monthly income. For more on bank personal loans, you can check out our infographic on using personal loan for immediate cash needs, or compare personal loans using our online tool.

Social lending programs

This type of lending might not be familiar to you, since Lenddo, the social microfinance site that deals with this type of lending in the Philippines, only started up here in 2011. Basically, what Lenddo does is use your activity on social media and your social media contacts to determine your creditworthiness, instead of relying on the credit score banks use. You build your score with them by using your trusted contacts, who vouch for your ability to pay back a loan. When everyone in your network pays back their loans on time, you all get good scores; but when one of you fails to pay on time, your whole network’s rating goes down. Thus, the idea of a close community and reputation is important to this lending program.

Social lending programs only make loans for “improving the quality of life”, such as education and medical emergencies, and not for “consumption spending”, like going on vacation or buying a new phone. They also tend to have higher interest rates than banks. They are an unconventional choice, but for those who haven’t had the opportunity to build bank-worthy credit and need money for important, life-improving expenses, they can be a real alternative.

Salary loan

Salary loans, as you can tell from the name, are only available to salaried, regular employees.

Some banks offer these loans in cooperation with companies. You can apply for a loan through the bank itself or through your HR department, and depending on your standing in the company, you can get approval in as soon as 3 days. You can then repay this loan via salary deduction over a period of time you specify.

If your company doesn’t have an arrangement, you can also apply directly to banks — Chinatrust and Sterling Bank of Asia have salary loan products.

Non-bank lending services (like Vidalia Lending Corporation, Multi Credit and Lending Corporation, and others) also offer salary loans payable by post-dated checks, but usually these come at a higher interest rate than banks, so do your research before applying for these kinds of loans.

Informal loans

You’ve probably heard of 5-6 loans, or ATM collateral loans, where lenders keep your payroll ATM and take their payments directly from your paycheck. Maybe you’ve even considered using these types of loans to get you through a rough patch.

Informal loans are everywhere; you can see 5-6 lenders operating in markets and neighborhoods. You can even search sites like OLX for people willing to give you a cash or ATM collateral loan fast, with very little effort on your part.

While informal loans can be easy to get, beware: they’re probably illegal. According to The Lending Company Regulation Act of 2007, lenders not already regulated by law (such as banks, credit unions, and pawnshops) have to be corporations granted authority by the Securities and Exchange Commission.

And just because they’re easy to get doesn’t mean they’re easy to pay back. Besides paying exorbitant interest, you can quickly find yourself drowning in penalties if you don’t make payments on time. For the lowest risk, you’re much better off taking out a loan from an established bank or government-accredited lender.