In the Philippines, the law defines a lending company as a stock corporation that extends credit to the public using its own capital or funds sourced from less than 20 persons. Such a business may also refer to itself as a lending investor or any other trade names as long as the primary activity of granting loans to ordinary individuals is clearly reflected.
In exchange for granting loans, a lending company can charge each of its borrowers (also called debtors) interest and other fees. An agreement between a lending company and a borrower must comply with the provisions of relevant laws.
The interest rates lending companies may charge could be prescribed by the Monetary Board to ensure that they are fair and reasonable based on the prevailing economic and social conditions in the country. The Monetary Board comprises the Governor of Bangko Sentral ng Pilipinas (BSP), who serves as the as the chairperson, one member from the Cabinet, and five full-time members from the private sector.
A lending company is not to be confused with a financing company. The latter can offer credit facilities to not just consumers but also commercial, agricultural, and industrial enterprises.
A financing company may lend money to borrowers by factoring accounts receivable or buying any evidence of indebtedness like a chattel mortgage among other means. Unlike a lending company, a financing company may enjoy different powers such as engaging in quasi-banking operations (with the authorization from the BSP) and participating in government-sponsored credit programs.
Both lending companies and financing companies can’t be classified as banks, cooperatives, insurance companies, savings and loans institutions, investment houses, and any financial institutions that are organized and/or operate under special Philippine laws.
Traditionally, most Filipinos do not seek credit from banks, which generally reject people with no verifiable employment and/or income. More borrowers use alternative lenders to obtain quick cash with little to no documentary requirements. In fact, bank lending in the country dropped from 2.1% in 2015 to 0.6% in 2017.
Unfortunately, many Filipinos, particularly those unbanked, fall victim to loan sharks. “Five-six” is arguably the most pervasive predatory alternative lending option throughout the archipelago. In this scheme, a borrower is charged one peso for every five pesos loaned. In other words, a “five-six” borrower contends with at least 20% interest over the repayment period.
It is not uncommon for the poorest and the most cash-strapped borrowers to get trapped in a practically endless debt cycle. That is why the Securities and Exchange Commission (SEC), the country’s corporate regulator, has begun a crackdown against loan sharks since President Rodrigo R. Duterte came to power in 2016.
To help avoid getting on the wrong side of the government, hundreds of informal lenders have applied for registration in order to do business in accordance to the law since 2017. As of September 30, 2019, there were 2,700 lending companies registered with the SEC.
Tighter regulation of the alternative lending industry in the Philippines is giving Filipinos easier access to loan products with fair terms and reasonable charges.
Furthermore, the advent of financial technology is also simplifying all the processes, from application to funds disbursement, germane to microfinance. These days, ordinary Filipino borrowers can get in touch with a lending company online through a mobile app and receive money more quickly.
To stay in business, lending companies must comply with three pieces of legislation in the country: the Consumer Act of the Philippines, the Lending Company Regulation Act, and the Truth in Lending Act. These laws define what can be considered consumer loans, how lending agreements must be crafted, and how much interest rates and any other fees could be collected.
The stricter enforcement of these laws have not only motivated countless alternative lenders to pursue business registration. But also it has resulted in the shutting down of dozens of unlicensed lenders.
The SEC issued cease-and-desist orders against at least 30 online lending applications in recent memory. The agency’s actions were based on verified grievances about misrepresentations on fees, outrageous loan terms and conditions, high-pressure collection methods, and violations of the right to privacy of borrowers.
The following are some of the unauthorized lenders the SEC recently shut down: Binixo, Cashafin, CashBus, Cashcat, CashFlyer, CashMaya, Cashope, Cashuttle, Cashwarm, Cashwow, Cash 100, Cash Whale, Crazy Loan, Creditpeso, ET Easy Loan, Flash Cash, Happy2Peso, Hatulong, Instant Pera, Lendmo Philippines, MeLoan, MoneyTree Quick Loan, Pera4u, Peramart, Pera Express, Peso2Go, PesoLending, QuickPera, QuickPeso, and Umbrella.
The SEC, through its Enforcement and Investor Protection Department, found out that the illegal lenders were guilty of using their applications to access pieces of personal information, such as phone numbers, email addresses, and social media accounts, stored in the mobile devices of their customers. In some cases, the unlicensed companies harassed delinquent borrowers by threatening them of public shaming over the Internet or legal action if they do not pay.
Under Section 12 of the Lending Company Regulation Act, a violator may be imprisoned from six months to 10 years, be slapped with a fine ranging from ₱10,000 to ₱50,000, or face both punishments.
The National Privacy Commission (NPC) also summoned lending companies accused of such frowned-upon collection practices.
The independent body filed charges against Fcash Global Lending Inc., Unipeso Lending Co., and Fynamics Lending Inc. (which operate the Fast Cash, Cashlending, and PondoPeso apps, respectively) for malicious and unauthorized disclosure of private information and noncompliance with the legal requirement of processing personal data among others. The said companies accounted for most of the complaints the NPC received from borrowers since July 2018.
In the Philippine context, “personal loan” is an umbrella term for many consumer loans. Generally, they are categorized by purpose or by collateral, and they share numerous features such as a fixed loanable amount and a relatively short repayment period.
To further understand how personal loans work, let us answer the five frequently asked questions about them below.
Not always. Some personal loans are secured, which means they require collateral that is subject to seizure in an event of default, but others are not.
Generally, larger personal loans must have a security to lower the financial risk a lender has to absorb in case a borrower discontinues repayment for whatever reason. On the other hand, smaller personal loans may be obtained without any collateral. However, you may pay for more interest to make up for the higher level of risk attached to an unsecured personal loan.
Lines of credit, which typically come in the form of credit cards, may be considered consumer loans to some extent, but they are not in the same class as personal loans.
A line of credit is used for borrowing a small amount of money to purchase goods or pay for services in real time. In this case, credit acts as a substitute to cash or actual funds in a bank account. A line of credit is available on tap and generally does not include any interest as long as the monthly balance is paid in full and on time.
A personal loan is used for obtaining funds for certain purposes. The money is electronically disbursed in a lump sum, and the loan’s repayment period begins whether or not the cash is spent. Interest is always charged, and other fees may apply.
No. Mortgages (or property loans) are usually in a category of their own. Like personal loans, mortgages are paid on installment. But unlike personal loans, mortgages usually come with terms that last more than a decade. Nine times out of ten, mortgages are used to purchase existing properties such as a townhouse or a condo unit. In some cases, a mortgage is taken out to fund house construction.
Amortization is the process of spreading out a loan into fixed monthly payments consisting of principal and interest amounts that change over time. Most of the interest gets paid first before the principal. Amortizing a personal loan helps reduce the financial risk for a lender while it renders the monthly payment fixed and predictable for a borrower.
Beyond the common features they share, personal loans in the Philippines can vary from lender to lender. To compare products properly, it is imperative to know all of the fees germane to each loan.
The interest rate is of utmost importance, for it tells you how much you need to pay extra to borrow the amount you need. However, interest is not the only charge there is.
Of all fees, the effective interest rate (EIR) arguably offers the most accurate representation of a personal loan’s real cost. The EIR takes into account all relevant charges. Moreover, it pays to learn about how the EIR is calculated in order for you to do the math yourself and discover any fees a lender might not be disclosing.
The EIRs of the most affordable personal loans in the Philippines range anywhere between 10% and 30%. But then again, you also have to factor in the repayment period of a loan. The shorter the term is, the higher the monthly payment goes. Opting for a loan with a long repayment period can keep installments to a minimum, but doing so will increase your overall cost of borrowing.
Like any form of debt, a personal loan has its own set of advantages and disadvantages.
If you have utility bills in your name, use credit cards moderately, and pay for insurance, taking out a personal loan can be an effective way to show how well you manage your finances.
Makati Loan is a tech-driven lending company that offers unsecured financial products to Filipinos via an Android app. Our seamless mobile process takes away the usual stresses and strains of applying for personal loans. At just 5% interest per month, you can borrow as much as ₱150,000 without breaking the bank. Our personal loans can be payable over six months, allow you to ensure that your installments as manageable as possible.
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