This article explains how the COVID-19 “Bayanihan” grace periods affected Philippine auto loans, what interest and charges may lawfully accrue, how computations should be done, where disputes usually arise, and practical steps to resolve them. It is written for borrowers and practitioners dealing with banks, quasi-banks, and financing companies.

1) Legal framework at a glance

Bayanihan to Heal as One Act (RA 11469) Mandated at least a 30-day grace period on loan payments due within the community quarantine, without penalties or additional fees. Interest could continue to accrue on the principal during the grace period, but no “interest-on-interest” (no compounding) was allowed. Accrued interest had to be payable on a staggered basis after the grace period, with the loan maturity extended as needed.
Bayanihan to Recover as One Act (RA 11494) Imposed a one-time 60-day grace period for existing loans falling due within the effectivity window, again without penalties or fees and no compounding. Accrued interest could be collected on a staggered basis or through maturity extension, subject to full disclosure and borrower-friendly arrangements.
Supervisory issuances (BSP for banks/quasi-banks; SEC for lending/financing companies; Insurance Commission for insurance-linked products) aligned on: (a) no late penalties, (b) no interest on unpaid interest, (c) no new fees or hidden charges just because of the grace period, (d) clear disclosure of any revised amounts and schedules.
Other applicable laws
- Truth in Lending Act (RA 3765): requires disclosure of finance charges and the true cost of credit.
- Financial Consumer Protection Act (RA 11765) and BSP/SEC market conduct rules: prohibit unfair, deceptive, or abusive acts or practices.
- Civil Code principles on obligations and contracts: good faith, no unjust enrichment.

2) What the grace period did—and did not—do

Did:

Suspend the due date of covered amortizations.
Allow interest on principal to continue accruing for the grace period.
Require no penalties, surcharges, or new fees due to the suspension.
Allow staggered collection of the accrued interest and/or extension of maturity.

Did not:

Waive or forgive the principal or the contract rate itself.
Authorize interest on unpaid interest (compounding) or capitalization of interest during the grace period.
Permit re-pricing, new “processing” or “deferral” fees, or forcing balloon payments that defeat the borrower relief intent.

3) How interest should have been computed on auto loans

Auto loans in the Philippines are priced commonly in two ways. The correct computation during the grace period depends on which applies to your contract.

A. “Add-on” interest (common for auto loans)

Contract set-up (before grace): Total Finance Charge = Principal × Add-on rate per year × Term in years Monthly Amortization = (Principal + Total Finance Charge) ÷ Term in months Interest is “spread” evenly; the effective annual percentage rate (APR) is higher than the stated add-on.
During grace: Interest continues to accrue only on the outstanding principal, not on the portion of interest embedded in the add-on amortization. Because add-on already front-loads interest, lenders must ensure no duplicate charging. The clean approach is to compute simple interest on principal for the grace months and collect it separately on a staggered basis or by extending maturity, without altering the original add-on finance charge already baked into the monthly.

B. Amortizing/declining-balance (effective rate) loans

Contract set-up (before grace): Monthly Rate r = (Nominal annual rate) ÷ 12 Monthly Amortization A is the standard annuity amount solving A = P · r / (1 − (1 + r)^(−n)), where P = principal, n = remaining months.
During grace: Simple interest for each grace month = P (outstanding before grace) × r. No compounding: you do not add that interest to principal to earn more interest. The accrued amount is then spread over the remaining installments or pushed to the end through an extension.

4) Worked examples (step-by-step)

These examples show the method, not your exact figures. Always use your contract’s actual rate, remaining term, and outstanding principal.

Example 1 — Add-on loan, 1-month grace

Outstanding principal: ₱600,000
Add-on rate: 10% per year
Remaining term: 36 months
Grace: 1 month

Step 1: Compute simple interest for the grace month Add-on rate (annual) = 10% ⇒ monthly simple rate = 10% ÷ 12 = 0.833333…% Grace interest = ₱600,000 × 0.00833333 = ₱5,000 (rounded)

Step 2: Decide collection method (both are lawful)

Staggered: add ₱5,000 ÷ 36 = ₱138.89 to each of the next 36 installments.
Extension: add 1 month to the schedule and collect ₱5,000 as the final interest item at the end (or any staggered plan you agree on).

Crucial checks: No “deferral fee,” no penalty, and the original add-on finance charge stays unchanged—you’re only paying the pure grace-period interest on principal.

Example 2 — Amortizing loan, 2-month grace

Outstanding principal: ₱500,000
Nominal annual rate: 12% ⇒ monthly r = 12% ÷ 12 = 1%
Remaining term: 24 months
Grace: 2 months

Step 1: Accrued interest (no compounding)

Month 1 interest: ₱500,000 × 0.01 = ₱5,000
Month 2 interest: ₱500,000 × 0.01 = ₱5,000
Total accrued = ₱10,000

Step 2: Collection options

Staggered: add ₱10,000 ÷ 24 = ₱416.67 to each of the next 24 installments.
Extension: extend 2 months and pay ₱5,000 each month as interest-only, then resume the original amortization.

Prohibited: Capitalizing ₱10,000 into principal and then charging interest on that ₱10,000 in later months.

5) What lenders could (and could not) charge

Allowed

Contract rate interest on principal for the grace period.
Documented, voluntary options to pay accrued interest (staggered or via maturity extension), with clear amortization tables.

Not allowed

Penalties, late fees, or new “deferral/processing” fees due solely to the grace period.
Interest on unpaid interest (no compounding/capitalization).
Hidden re-pricing or revising the rate because of the law-mandated deferral.
Forcing a large balloon that defeats borrower relief when a reasonable staggered/extension plan is feasible.

6) Where disputes usually arise

Compounding sneaked in Accrued interest is silently added to principal (“capitalized”), so later interest accrues on that interest. Remedy: demand a recomputation that keeps accrued interest off-principal and collected separately.
Add-on overlap Because add-on already front-loads interest, some systems accidentally double-count by also charging “grace interest” as if it were a pure declining-balance loan. Remedy: insist the lender compute only simple interest on principal for the grace period and show the worksheet.
Undisclosed fees or “handling charges” Any new fee tied to the grace program is generally impermissible. Remedy: ask for the legal basis; cite the fee prohibition under the Bayanihan framework.
Incorrect amortization table After the grace period, schedules must be updated and disclosed. Missing/incorrect tables often hide errors. Remedy: request a full recomputation with: (a) remaining principal, (b) accrued interest detail per month, (c) revised payment schedule, (d) totals reconciling to the contract.
Balloon payment pressure Borrowers are told to pay all accrued interest at once. The law’s intent allowed staggered payments. Remedy: propose a staggered schedule or maturity extension—both consistent with the relief framework.

7) Practical playbook for borrowers (and counsel)

Get the paper trail. Ask for (a) your original loan disclosure, (b) payment history, (c) system ledger, (d) the grace-period recomputation sheet, and (e) the revised amortization table.
Check three red flags: (1) any fee added; (2) accrued interest merged into principal; (3) a higher monthly rate than your contract rate.
Do the math yourself (using the steps above) and compare.
Escalate internally to the lender’s consumer assistance/office of the president with a clear, dated letter (see template below).
Regulator routes (choose based on entity type):
- Banks/quasi-banks: Bangko Sentral ng Pilipinas (BSP) consumer assistance.
- Financing and lending companies: Securities and Exchange Commission (SEC) Corporate Governance & Finance Department.
Document your position with a simple spreadsheet showing: pre-grace principal, rate, grace months, accrued interest per month, and how it is collected (staggered or by extension).
Be open to reasonable extension (same rate, no new fees) if cash-flow relief is the main concern.

8) Model dispute letter (you can adapt)

Subject: Request for Bayanihan Grace-Period Recalculation and Removal of Unlawful Charges — Auto Loan [Account No.]

Dear [Lender], I am writing regarding my auto loan [Account No.], which was covered by the Bayanihan grace period(s). I request a full recomputation consistent with the law’s no penalties, no fees, and no interest-on-interest principles.

Kindly provide within fifteen (15) days:

The system ledger and payment history;

The worksheet showing accrued interest only on principal for the grace months, with no capitalization;

The revised amortization schedule, indicating how accrued interest will be collected on a staggered basis or through maturity extension; and

A certification that no fees or penalties were imposed due to the grace period.

On my review, the current schedule appears to [describe issue: e.g., capitalize accrued interest / impose a deferral fee / create an undue balloon]. Please correct this and confirm the updated figures.

I remain ready to settle lawfully computed amounts. Thank you.

Sincerely, [Name] [Address / Email / Mobile]

9) Quick checklist for a lawful recomputation

Interest for each grace month = (Outstanding principal before grace) × (monthly rate)
No interest charged on any unpaid interest
No penalties, surcharges, or new administrative/processing fees tied to the grace
Accrued interest is collected separately (staggered) or via maturity extension, not capitalized
Revised amortization table disclosed and consistent with the above
Totals reconcile to the original contract rate and remaining term, adjusting only for the grace mechanism

10) Frequently asked questions

Q: My bank added two extra months at the end and asked me to pay interest-only in those months. Is that allowed? A: Yes, if those months collect only the simple interest on principal for the grace period, no fees, and your regular amortization resumes thereafter.

Q: They increased my monthly installment instead of extending the term. Is that allowed? A: Yes, if it’s only to spread the accrued interest on a staggered basis and the increase matches the math. You may request an extension instead.

Q: They added a “processing/deferral” fee. A: That is generally not permitted when it stems from a law-mandated grace period. Ask for removal and a recomputation.

Q: They rolled the accrued interest into principal. A: That creates interest-on-interest and is not allowed. Demand separation and a corrected schedule.

11) Takeaways

The Bayanihan laws provided payment relief, not rate holidays, and strictly prohibited compounding, penalties, and new deferral fees.
Correct treatment is simple interest on principal for the grace months, then staggered collection or maturity extension—with full, transparent disclosure.
Most disputes trace to capitalization, double-counting under add-on, or undisclosed charges.
A calm paper-trail approach—ask, verify, recompute, escalate—resolves most cases.

This article provides general information and is not a substitute for legal advice. For complex disputes or large variances, consult counsel who can review your contract, lender disclosures, and ledgers.