Prepayment of car loans in the Philippines: Meaning, penalties, benefits, & more

Settling on a car for a buyer is no child’s play and more difficult than that is getting approved for a car loan. Wait, the hurdles do not end here, as you now have to worry about repaying the loan on time and not getting tagged as a defaulter.

To keep your credit history clean, plan the whole payment schedule thoroughly and set your budget so that the monthly payments are made hassle-free. But did you know there are ways to speed up the loan repayment process?

Yes, by learning how to manage your debts and your loans, it is possible to pay the loan early, easily, and smoothly. This process of getting rid of the loan early is called PREPAYMENT.

What is prepayment? It refers to the scenario wherein the lender makes additional payments on a loan before the scheduled due date. It helps minimize the loan duration and save on interest payments. Example - Making prepayment to a four-year loan to bring it down to a shorter repayment period of three years.

 

Car loan prepayment Key factors to consider

Are you interested in paying off your car loan early? If your answer is YES, then there are a few factors to consider first; learning about them will make the process quick and hassle-free.

Interest rate

Car loans come with fixed interest rates in the Philippines. The rate is different for each bank and lender; it usually depends on several factors on the borrower’s end -

• Credit score
• Income
• Car’s condition (new or used)
• Debts
• Loan terms

In the Philippines, interest rates typically range from 4.10% to 37.63% depending on the above factors. It is advised to compare interest rates before finalizing the lender; this will help you manage your monthly budget properly and might even pay off the loan early.

Penalties

Some banks and financial institutions charge penalties in the form of ‘processing fees’ from the borrower against loan prepayment. It is usually equivalent to 3% of the remaining principal balance plus the unpaid interest for the month.

Therefore, when getting a loan, it is advisable to inquire about such charges to save the additional cost.

Financial obligations

If you are planning to pay off your loan early, it is advisable to consider your other financial obligations like bills, other debts, etc. In case you have extra money after meeting all the other obligations, feel free to pay your loan early. If not, just pay the monthly installment song with other payments.

Understanding car loan prepayment & processing fee

Wondering why we are discussing processing fees. So, as per Article 137 of Republic Act No. 739, aka Consumer Act of the Philippines, “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.”

Then why do banks and other lending institutions charge prepayment penalties? Isn’t it illegal? The answer is NO. There is a loophole in the law that allows the lender to apply such penalties to the borrower. Wanna know more about the loophole? Believe it or not, it is a rather lame loophole, the lenders are not describing it as a loan prepayment penalty but are marking it as a ‘processing fee’.

So, next time when you apply for a loan, do ask the lender if there is any loan processing fee against the prepaying loan balance. While such fees are mostly non-negotiable, there is no harm in trying or searching for a lender that does not charge any such fee.

Law and the ‘processing fee’

The law in the Philippines has several legal frameworks that not only govern the interest rate but also the fees imposed by banks and financial institutions, like the processing fees. Talking specifically about processing fees, it is a common feature in the loan agreement and are charged by the lender to cover operational and administrative expenses.

Here are a few laws that talk about lending & processing fees in the Philippines -

• The Truth in Lending Act (Republic Act No. 3765): Makes sure that the borrower gets all the information (full transparency), in terms of fees & charges.
• The General Banking Law of 2000 (Republic Act No. 8791): This one regulates the lending activities of banks & other financial institutions.
• Bangko Sentral ng Pilipinas (BSP) Circulars and Regulations: It has issued circulars regulating the lending practices of financial institutions (banks & non-banks). It even issued one on the imposition of processing fees.
• The Securities Regulation Code (Republic Act No. 8799): It governs lenders and financial institutions that give loans to consumers & businesses.

Also Read: Understanding Balloon Payment: A flexible financing option for Filipino buyers

Processing fee Limit & Determining factors

There is no specific limit on the amount a financial institution can charge as processing fees. However, this does not mean the lender can impose exorbitant fees. The amount must be reasonable and justified by the actual cost incurred in loan approval and processing; such cost may include (but is not limited to) -

• Notarial fees
• Credit investigation fees
• Legal fees
• Document preparation fees
• Miscellaneous administrative expenses

 

Processing fees Bank vs informal lenders

In formal institutions like banks and other learning companies, processing fees are often low, as they benefit from economies of scale and follow a standardized process. On the other hand, informal lenders often impose high fees due to the higher cost of processing each transaction.

In terms of negotiation, processing fees at banks and other financial institutions are not flexible, they generally have a standard fee structure that applies to everyone uniformly. Informal financial bodies, on the other hand, are more flexible and open to negotiation; especially for those with a good credit score and substantial loan amount.

Excessive processing fees Remedies

In case you feel that a bank or financial institution has charged you with unreasonably high processing fee then here are some legal options to seek help -

• Bangko Sentral ng Pilipinas (BSP): BSP has the authority to investigate complaints against lenders (bank or non-bank institutions) regulated by it. All a client needs to do is file a complaint with its Financial Consumer Protection Department.
• Securities and Exchange Commission (SEC): The SEC regulates financial institutions and lending investors. Any issues here can be revoked by filing a complaint with the SEC.
• Civil Action: Under the Civil Code of the Philippines, borrowers can file a civil suit for damages against lenders who have changed them with egregious processing fees.
• Small Claims Court: This option is relatively quick and inexpensive with no lawyer needed. Borrowers just need to pursue a claim here to recover the excessive amount paid as fees to the lender.

Early loan payment Pros & cons

Pros	Cons
Early loan payment translates to no more need to pay interest	Prepayment charges are sometimes more than the interest charged
Improves credit score	Requires borrower to control spending
Opportunity to get a new loan
No more budget crunch, spend money as you like

Tips to pay your car loan early

Now that you are through with the factors to consider before prepayment along with the penalty imposed by banks and other lending institutions on customers making early payments, it is time to discuss ways to pay off the car loan faster.

• Round up your payments: This one is pretty simple, just round up your monthly installments (by a few pesos), and before you know it your loan is paid off before time.
• Contribute extra: Direct all your tax refunds, and bonuses towards paying your car loan. Do not spend it on non-necessities, as they can wait until you are clean from the loan payments.
• Minimise expenses: In addition to contributing tax refunds and bonuses, pour money towards your monthly loan payments by cutting off your expenses.
• Cancel add-ons: Consider removing add-ons (like extended warranties and preventive maintenance services) as they add to the expense.
• Find additional income sources: Try finding additional income-generating sources and use the extra money to pay off the loan faster.

Bottom line

Whether you pay off your car loan early or not depends majorly on the lender. Before deciding, it is important to consider all the potential charges/fees, pros & cons, and understand what you will gain against what is at stake. Whatever might be the case, remember the law is with you, though it does not directly put a cap on the processing fees but ensures the details remain transparent and listens to claims against exorbitant fees.

Also Read: Bank vs Dealer Financing: Which is better for Filipino car buyers?