Are Processing Fees Subject to Interest?

Philippine Truth in Lending and Loan Disclosure Rules

Executive summary (TL;DR)

“Processing fees” are part of the “finance charge.” Under the Philippine Truth in Lending framework, they must be clearly disclosed and included when computing the loan’s effective interest rate (EIR/APR).
Two very different treatments in practice:
1. Deducted upfront from the proceeds (not added to principal): the fee doesn’t itself bear contractual interest, but it raises your EIR because you borrow ₱X yet receive less than ₱X.
2. Capitalized/financed (added to principal): the fee becomes part of the amount you owe and does bear interest like the rest of the principal—if there’s a valid stipulation.
Regardless of form, lenders must itemize and disclose fees, the nominal rate, the EIR, total finance charge, amortization schedule (on request), and key penalties—before you sign.
Usury ceilings are suspended, but rates/fees and capitalization clauses can still be struck down if unconscionable or insufficiently disclosed.

1) Legal foundations

Truth in Lending (TIL)

Republic Act No. 3765 (Truth in Lending Act) requires creditors to fully disclose the true cost of credit in writing before consummation of the transaction.
Bangko Sentral ng Pilipinas (BSP) regulations (integrated in the Manual of Regulations for Banks/Non-Bank Financial Institutions) operationalize TIL through standardized disclosures and the Effective Interest Rate (EIR) methodology. In essence:
- The “finance charge” includes interest and all charges incident to the extension of credit (e.g., service/processing/appraisal fees, investigation fees, credit life premiums if required, dealer incentives tied to the loan, etc.).
- Charges not incident to the extension of credit (e.g., truly pass-through taxes, independent notarial fees paid to third parties) are typically excluded from the finance charge—but must still be shown if collected.

Civil Code constraints on interest and capitalization

Interest requires stipulation; without it, only legal interest may be imposed from the time of demand or default.
“Interest on interest” (capitalization/compounding of past-due interest) requires an express and valid stipulation or a judicial demand. The same logic applies to capitalizing fees into principal: it must be clearly agreed and not unconscionable.

Usury

Usury ceilings have been suspended (no hard cap), but courts may strike down unconscionable rates/fees or reduce them equitably. Transparency remains the principal protection: the borrower must be able to understand the true cost of credit.

2) What exactly is a “processing fee”?

In consumer and SME loans, a “processing,” “service,” “origination,” or “handling” fee is an administrative charge for evaluating, booking, and servicing the loan. Under TIL rules, it is part of the finance charge and must be disclosed conspicuously—not hidden in the fine print or blended into the “interest” line.

Key disclosure expectations:

Amount of the fee and how/when it’s collected (deducted upfront? added to principal?).
Whether it is refundable if the loan does not proceed or is pre-terminated before release.
Whether the fee itself will bear interest (i.e., if it is capitalized).
Its effect on the EIR/APR.

3) Are processing fees “subject to interest”?

A. Fee deducted upfront (not added to principal)

No separate interest is charged on the fee itself.
But your EIR goes up because you pay interest and amortizations as if you had received the full principal, even though you actually received less (principal minus the fee). Economically, that fee functions like prepaid interest.

Illustration (amortizing loan):

Amount financed (contractual principal): ₱100,000
Stated rate: 24% p.a. (2% per month); term: 12 months; monthly amortization: ≈ ₱9,455.96
Processing fee: ₱5,000 deducted upfront, so cash released is ₱95,000.
Effective monthly rate ≈ 2.845% ⇒ EIR ≈ 40.03% p.a., far above the 24% nominal. (Same payments, less cash received → higher true cost.)

B. Fee capitalized/financed (added to principal)

The fee becomes part of the principal and does bear interest like any other portion of the loan—if validly stipulated.
Using the same parameters but adding the ₱5,000 to principal (so ₱105,000 financed; you receive ₱100,000 in cash):
- Monthly amortization becomes ≈ ₱9,928.76.
- EIR ≈ 39.35% p.a. (still much higher than 24%, but slightly lower than the “deducted upfront” case because the borrower receives the full ₱100,000).

Takeaway: Whether deducted or capitalized, processing fees raise the EIR. They bear contractual interest only when capitalized—but in both cases, the borrower’s true cost increases and must be disclosed.

4) Required disclosures and borrower rights

Before you sign, you should receive (in clear, prominent language):

Stated/nominal rate and the EIR/APR using the BSP-prescribed method.
Itemized finance charges: interest, processing/service fees, appraisal fees, required premiums, documentation charges, and any pass-through taxes.
Total amount to be financed, amount actually disbursed (after any deductions), and total of payments over the life of the loan.
Payment schedule (frequency, number of installments, due dates) and amortization schedule upon request.
Penalties for late payment, default interest, and any prepayment/termination fees.
Whether fees are capitalized or deducted, and whether interest will accrue on those fees.
Right to prepay (and how the payoff amount is computed, including the handling of unearned interest and fees).

For credit cards and revolving credit:

Additional consumer protection rules apply (billing cut-offs, grace period, finance charge computation, late/over-limit fees). The core TIL principles still require clear itemization and EIR/APR disclosure.

5) Compliance pitfalls (for lenders) and how to avoid them

Undisclosed net-proceeds lending: quoting a low “interest rate” while netting multiple fees from disbursement, without presenting the EIR.
Ambiguous capitalization: rolling fees into principal without an explicit clause and borrower consent.
Bundled, mandatory add-ons (e.g., credit life, membership fees) not separately disclosed, or making optional products seem mandatory.
Penalty and default interest clauses that are unclear, compounding without stipulation, or excessive.
Failure to provide amortization schedules or to reflect prepayments correctly (interest should accrue only on outstanding principal, adjusted when you prepay).

Good-practice checklist:

Present a one-page “Key Facts” or “Disclosure Statement” showing Nominal Rate and EIR, cash disbursed vs. amount financed, and every fee.
State in plain language whether a fee will be deducted or financed.
Provide worked examples (₱ amount and timing) matching the borrower’s loan.
Make the amortization schedule readily available and keep a fee tariff posted and up to date.

6) Borrower strategies

Ask for the EIR/APR, not just the “rate per month.”
Compare “cash in hand” across offers (some lenders net out more fees).
Clarify capitalization: If a fee is added to principal, you’ll pay interest on it. If it’s deducted, confirm the net proceeds and see how that pushes your EIR.
Check prepayment terms: How are unearned interest and fees handled? Are there prepayment penalties?
Watch for compounding: Default interest or penalty fees that compound or capitalize require clear stipulation; challenge terms that look unclear or excessive.
Keep copies of the signed Disclosure Statement and Loan Agreement.

7) Worked examples (step-by-step logic)

The numbers below illustrate the mechanics—your contract will differ.

Scenario 1 — Fee deducted

Principal (contract amount): ₱100,000
Stated interest: 24% p.a. (2%/month)
Term: 12 months, level amortization
Processing fee: ₱5,000 deducted; cash released = ₱95,000
Monthly payment ≈ ₱9,455.96
Monthly IRR ≈ 2.845% ⇒ EIR ≈ 40.03% p.a.

Scenario 2 — Fee capitalized

Amount financed: ₱105,000 (₱100,000 cash to you + ₱5,000 fee added)
Same 24% p.a., 12 months
Monthly payment ≈ ₱9,928.76
Monthly IRR ≈ 2.804% ⇒ EIR ≈ 39.35% p.a.

Observation: Deducting the fee pushes the EIR slightly higher than capitalizing it because you receive less cash for similar installment outflows.

8) Frequently asked questions

Q1: Can a lender charge interest on a processing fee? Yes, if the agreement capitalizes the fee into principal (valid stipulation, not unconscionable). If it’s only deducted from proceeds, the fee does not itself bear contractual interest, but your EIR still rises.

Q2: Is it legal to net out multiple fees at release? Yes, but all such fees must be itemized and disclosed beforehand, and the EIR must reflect them.

Q3: Are late fees and default interest part of the finance charge? They are charges incident to credit and must be disclosed. If triggered, they increase the total cost; if they capitalize or compound, that requires express, valid stipulation and may be assessed for conscionability.

Q4: What if the rate/fees feel excessive? Even without usury caps, courts can reduce or nullify unconscionable terms. Lack of proper TIL disclosure also weighs against enforcement of disputed charges.

Q5: Can I demand an amortization schedule and a payoff quote? Yes. You’re entitled to transparent schedules and a clear prepayment computation showing principal, earned interest, unearned interest, and any valid fees.

9) Practical compliance template (for lenders)

Disclosure box (pre-contract):
- Loan amount (contractual principal)
- Net cash disbursed (after deductions)
- Nominal rate and EIR/APR
- Finance charge breakdown: interest, processing, appraisal, premiums, taxes/fees (identify pass-throughs), other charges
- Total of payments; number/frequency of installments
- Treatment of fees (deducted vs. capitalized) and whether they bear interest
- Penalties, default interest, and whether they compound/capitalize
- Prepayment policy and sample computation

10) Bottom line

In the Philippines, a processing fee is a finance charge and must be prominently disclosed.
If capitalized, it bears interest like principal (subject to a valid stipulation).
If deducted upfront, it doesn’t bear its own contractual interest—but it materially increases your EIR and must be captured in the APR/EIR disclosure.
Proper Truth in Lending compliance turns a “2% per month” sales pitch into a clear picture of the true cost of credit.

This article provides general information on Philippine lending disclosures and should not be taken as legal advice for a specific transaction. For deal-specific review, examine the exact loan agreement, disclosure statement, and fee tariff.