PH Trend Watch

Add-On vs Diminishing Balance Interest: How Much Does Your Loan Really Cost?

By the PH Trend Watch team · Updated October 29, 2026

Two lenders both offer you a loan at "1.5% a month". One will cost you far more than the other. The difference is how the interest is computed — and it is one of the most common money traps for Filipino borrowers.

Add-on interest

With add-on interest, the lender computes interest on the full original amount for the whole term, adds it to the loan, and divides the total into equal payments. You keep paying interest on money you have already paid back.

Example: ₱100,000 for 12 months at 1.5% a month add-on.

  • Interest: ₱100,000 × 1.5% × 12 = ₱18,000
  • Total to repay: ₱118,000, or about ₱9,833 a month

Diminishing balance interest

With diminishing balance (also called declining balance or amortised) interest, each month's interest is charged only on what you still owe. As your balance goes down, so does the interest. This is how most bank housing loans and many personal loans work.

Same example on diminishing balance: ₱100,000 for 12 months at 1.5% a month works out to about ₱9,168 a month, with total interest of roughly ₱10,000 — about ₱8,000 less than the add-on loan.

The rule of thumb

An add-on rate costs roughly 1.7 to 1.9 times the same diminishing rate over a typical one-to-three-year loan. So a "1.5% add-on" loan is closer to 2.7% a month on a diminishing basis.

How to compare loan offers

  1. Ask for the effective interest rate (EIR). Under the Truth in Lending Act (Republic Act 3765), lenders must disclose the true cost of credit before you sign. The EIR includes the way interest is computed and most fees.
  2. Compare total amount repaid, not the monthly rate. Multiply the monthly payment by the number of months.
  3. Check the fees. Processing fees, service charges and insurance deducted from the proceeds raise the real cost, because you receive less cash than you borrow.
  4. Ask about early payment. On add-on loans, paying early may not reduce your interest. Ask how pre-termination is computed.

Watch out for online lending apps

Only borrow from lenders registered with the Securities and Exchange Commission (SEC) or supervised by the Bangko Sentral ng Pilipinas (BSP). Unregistered apps often charge very high fees and use abusive collection practices. You can check a lender's registration on the SEC website before borrowing.

This guide is general information, not financial advice. Rates in the examples are for illustration only.

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