Loan “Full Payment Waiver” Fees in the Philippines

A comprehensive legal-regulatory primer (July 2025)

Quick take-away: In Philippine practice a Full Payment Waiver fee (FPW)—sometimes called a pre-termination, early-settlement or pre-payment fee—is the amount a lender charges when a borrower opts to pay the entire outstanding balance of a term loan before maturity. While the fee itself is not per se illegal, it is tightly boxed-in by consumer-protection statutes, Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC) rules, contract law, and a growing body of jurisprudence on unconscionable charges. Failing to observe those limits can void the fee, trigger refunds, administrative sanctions, and even criminal liability for lending-companies acting “in the business of lending,”^1 including digital-only lenders.

1. Where the concept comes from

Common label	Typical Philippine context	Practical purpose
Full Payment Waiver (FPW)	Auto/consumer-durables financing, POS-installment, fintech cash loans	Compensates lender for “waiving” the right to collect future interest it had already priced into a pre-computed amortisation schedule.
Pre-termination / Early-termination fee	Corporate and real-estate term loans	Covers break-funding costs, administrative work, opportunity loss.
Pre-payment penalty	Older housing loans (pre-RA 8368), some mortgage-credit cooperatives	Discourages flight from fixed-rate funding.

Because most retail loans in the Philippines are written on a “diminishing balance” basis (interest computed only on the outstanding principal), a true FPW appears mostly on pre-computed or add-on interest loans— common in motorcycle, appliance and fintech micro-loans.

2. Statutory & regulatory framework

Layer	Key provisions (Philippine law)	Relevance to FPW
Civil Code (Arts. 1159, 1306, 1229, 1961)	Freedom to contract & penalty clauses must be equitable; courts may reduce unconscionable interest/penalties.
Truth in Lending Act – RA 3765 & BSP Circ. 830/960 (Sub-sec. X320 / MORB Sec. 303)	All charges—including any FPW—must be fully disclosed in writing before consummation, together with effective interest rate (EIR). Hidden or post-hoc fees are void.
Lending Company Regulation Act 2007 – RA 9474 & SEC MC 19-19 / 28-21	Lending companies & their digital subsidiaries must register every “rate and charge” with the SEC; excessive or misleading fees are “unsafe or unsound” practices subject to fines (P10k-P1 M) & licence revocation.
General Banking Law 2000 – RA 8791 & BSP MORB/MORNBFI	Banks may impose “reasonable and properly disclosed” fees; new or increased fees require 60-day prior notice to BSP and borrowers (Circ. 853).
Consumer Act – RA 7394 (Art. 52)	Deceptive sales acts or “hidden charges” are prohibited; DTI can seize advertising and impose fines.
Financial Products and Services Consumer Protection Act 2022 – RA 11765 & IRR (2023)	Gives BSP/SEC/IC “visitorial” powers, caps “unreasonable charges”, mandates simple, prominent disclosure boxes, streamlines complaints (BSP-CAMS, SEC-CIFT). Violations: up to ₱2 M per transaction, plus disgorgement.
Insurance Code & Circular 2016-54 (Credit Life & Disability)	Clarifies that an optional Loan Payment Protection Plan (which pays the balance upon death/disability) is an insurance premium, not an FPW, and must be underwritten by a licensed insurer.

3. Is an FPW legal? — The three-step test

Contractual authority – Was the FPW expressly stipulated in the loan contract or disclosure statement signed by the borrower?
Regulatory approval & disclosure – Was it (a) included in the EIR computation under RA 3765, and (b) reported/cleared with BSP or SEC before roll-out?
Reasonableness / unconscionability – Is the amount proportionate to the lender’s actual administrative or break-funding cost? The Supreme Court will strike down fees that are “iniquitous or unconscionable,” even if mutually agreed (e.g., Spouses Abellera v. Spouses Diaz, G.R. 211933, 1 Feb 2023; penalty and interest cut from 12% p.m. to 6% p.a.).

Rule of thumb: If the FPW makes the all-in cost of credit exceed what was disclosed or pushes the EIR far above market without clear justification, regulators will likely deem it unreasonable.

4. Interaction with the right to pre-pay

Unlike the U.S. Truth in Lending Act’s §1639c or the EU Mortgage Credit Directive, Philippine law grants no absolute right to pre-pay without penalty—except:

Special case	Governing rule
Social Housing & Pag-IBIG loans	RA 9679 & HDMF guidelines: no pre-payment penalty, rebates mandated.
Housing loans covered by RA 8368 (abolition of the Real Estate Mortgage Usury Law ceilings)	Lender may impose a pre-payment penalty only if expressly stipulated and reasonable.
Microfinance loans < ₱150k	BSP Circ. 563: borrower may prepay anytime and must receive a proportional interest rebate—charging an FPW and forfeiting the rebate would be double-dipping and likely void.

5. How regulators evaluate the “reasonableness” of an FPW

BSP’s Schedule of Sanctions (MORB Appendix 77) lists Tier 1 violations for “charging fees not fully disclosed / not approved,” carrying fines up to ₱30,000 per day plus restitution. Factors weighed:

Cost-basis evidence – internal memo quantifying admin/break-funding cost.
Comparative market practice – benchmark against peers; median FPW on motorcycle loans is ~4 % of outstanding principal, while banks average 1-2 % on auto loans.
Borrower segment vulnerability – micro, rural, or first-time borrowers get stricter scrutiny.
Timing disclosure – any fee introduced mid-tenor without 30-day written notice is automatically disallowed under BSP Circ. 857 §X320.9.

6. Jurisprudence snapshot

Case (latest citation)	Holding relevant to FPW / penalties
Spouses Abellera v. Spouses Diaz, G.R. 211933 (01 Feb 2023)	Penalty and interest rates “not reflective of actual damages” reduced to legal interest; emphasised doctrine that courts may equitate penalty clauses.
DBP v. Adil, G.R. 241377 (18 Jan 2022)	Bank’s “early settlement fee” void for lack of prior disclosure under RA 3765.
Finasia Lending v. DTI, CA-G.R. SP 171225 (14 Dec 2021)	Upheld DTI’s cease-and-desist order against “processing + full payment waiver” fees that were not itemised in marketing materials.
Uy v. Santia-Giron, G.R. 236420 (29 Jun 2020)	A flat three-month interest penalty on pre-payment struck down as unconscionable; refund plus 6 % p.a. ordered.

7. Tax & accounting treatment

Documentary Stamp Tax (DST): The FPW itself is not subject to DST; DST was already paid on the original principal (RA 7660).
VAT: Interest, fees and penalties on loan transactions of banks & non-bank financial intermediaries are exempt from VAT (NIRC §109(V)).
Withholding tax on interest: Unaffected; FPW is a fee, not interest, so no final tax.
IFRS 9 recognition: FPW income is recognised as a modification gain on derecognition of the original financial asset; lenders must compute the net present value of cash-flows with and without pre-payment.

8. Compliance checklist for lenders (2025)

Board-approved product program describing FPW rationale and cost basis.
Regulator filing:
- Banks: Prior written BSP product approval (if novel) or post-facto report (if rate change within existing approval).
- Lending companies & financing companies: SEC Form LC-FEE-01 (2024) 15 days before effectivity.
Disclosure box in Loan Disclosure Statement (LDS) expressly stating:

“Full Payment Waiver Fee: 3 % of remaining principal (min ₱1,000, max ₱10,000) if loan is settled in full before maturity. Effective interest rate assuming pre-payment on month 12: 43.21 % p.a.”
Client advice letter at least 30 days before implementation of a new or higher FPW for existing borrowers.
Complaint-handling procedure in line with RA 11765 IRR Sec 25.

9. Borrower’s practical toolkit

Action	Why it matters
Ask for the LDS & amortisation schedule	Check if the FPW appears before you sign.
Compute your net savings	Compare interest saved vs FPW cost; for add-on loans you might still save money despite a 4 % FPW.
*Invoke the BSP Online Buddy* (BOB) or SEC CIFT portal**	Free, online complaint channels; regulators typically act within 7-15 working days.
Cite RA 3765 & RA 11765	Most front-line staff respond faster when you reference the exact legal basis.

10. Penalties for non-compliance (high level)

Regulator	Fine per violation	Ancillary sanctions
BSP	Up to ₱1 M per day (Tier 1); restitution & public naming	Suspension of new loans, disqualification of directors & officers
SEC-Financing & Lending Division	₱25 k-₱1 M + ₱2 k/day of continuing violation	Revocation of licence, criminal referral to DOJ
DTI (Consumer Act)	₱500-₱300 k and/or jail 1-6 months	Closure of business premises
RA 11765 criminal	Up to ₱2 M fine and/or 5 years imprisonment for willful, repeated acts

11. Distinguish from Credit-Life and Debt-Cancellation products

Some stores bundle a “Full Payment Waiver” that cancels remaining instalments if the item is destroyed (for gadgets) or upon death / total-permanent disability. BSP & IC treat this as non-life or life insurance. Key compliance points:

Must be underwritten by a licensed insurer, not the lender.
Premium must be shown separately; cannot be rolled into “processing” or FPW fee.
Borrower may opt out under Insurance Code Sec 229.

12. Emerging issues (2024-2025)

Digital-only lenders & “click-wrap” consent – SEC MC 2-2024 now requires a screen-capture audit trail showing the FPW disclosure before the borrower clicks Agree.
E-money-backed BNPL models – Because the funder is often an offshore SPV, BSP has proposed a 0 % cap on FPW for pay-in-30-day BNPL (Consultative Paper, April 2025).
AI-pricing & Fair Lending – RA 11978 (Financial AI Accountability Act, pending Senate) would require that “algorithmic fees,” including FPW, be explainable and non-discriminatory.

13. Key take-aways for practitioners

Disclosure is king. An undisclosed FPW is legally dead on arrival.
Reasonableness is queen. Even a disclosed fee will fall if the amount is out of line with real costs or market norms.
Process is the castle. Product governance, regulator filings and customer-notification steps keep lenders inside the moat.

Endnotes

“Any person who for his own account engages in the business of granting loans...” — RA 9474, §3(a).

Disclaimer: This article provides general information as of 16 July 2025 and is not a substitute for tailored legal advice. For specific transactions, consult Philippine counsel or the relevant regulator.