Add-on rate vs effective interest rate: the difference

Philippine banks and dealers almost always advertise car and motorcycle loans with an add-on rate. It makes monthly payments easy to compute, but it is not comparable with a savings rate, a credit card rate or a home loan rate. This guide shows how to convert one into the other, using the published car loan rates we track (last checked November 2026).

What is an add-on rate?

An add-on rate is the total interest for the entire term, expressed as a percentage of the amount financed. The interest is computed once, added to the principal, and the sum is divided into equal monthly payments.

The formula:

• Total interest = amount financed × add-on rate
• Monthly payment = amount financed × (1 + add-on rate) ÷ number of months

Example: ₱800,000 financed at a 31.01% add-on over 60 months gives total interest of ₱248,080 and a monthly amortization of ₱1,048,080 ÷ 60 = ₱17,468.

Some lenders quote the add-on per month or per year instead ("1.2% per month add-on"). Multiply by the number of months or years to get the total, then use the same formula. Always ask which one you are being quoted.

What is the effective interest rate (EIR)?

The EIR is the yearly rate that, applied to the balance you actually owe each month, produces exactly your payment schedule. Banking regulators define it as the rate that discounts all the payments you will make back to the net amount of loan proceeds you received.

In practice the monthly rate r is the one that solves:

Amount received = monthly payment × [1 − (1 + r)^−n] ÷ r

where n is the number of payments. There is no neat closed-form answer, so it is solved by trial (Excel's RATE(n, -payment, amount) does it). Multiply r by 12 for the yearly figure banks disclose. Compounding it, (1 + r)^12 − 1, gives a slightly higher effective annual rate.

For the example above, r is 0.9325% a month, which is 11.19% a year. BPI publishes exactly that figure beside its 31.01% add-on rate.

To check any quote yourself in Excel or Google Sheets, type =RATE(60, -17468, 800000) * 12 and you get about 11.19%. Replace 60 with the number of months, 17468 with the monthly payment the dealer or bank quoted, and 800000 with the amount you actually receive after any upfront fees. If the answer is far above the bank rates in the tables below, ask why before you sign.

Why does a 30% add-on over 5 years cost so much more as an EIR?

Because add-on interest is charged on the full original loan for all 60 months, while you repay principal from month one. By the last year you owe only a fraction of the original amount but are still paying interest as if you owed all of it.

Spread evenly, a 30% add-on over 5 years looks like 6% a year. But your average balance over the loan is only a little over half the amount borrowed. Paying 6% of the full loan each year on roughly half of it means the real rate is close to double: 10.85% a year for a 30% add-on over 60 months.

Add-on rate over 60 months (total interest)

30%

Add-on spread per year, the misleading 'flat' figure

6%

Effective interest rate per year

10.85%

The longer the term, the bigger the gap, which is why the yearly flat figure rises only slowly while the EIR climbs and the peso interest climbs fast.

Term	Monthly	Total interest
12 months	₱70,658	₱47,896
24 months	₱37,237	₱93,688
36 months	₱26,119	₱140,284
48 months	₱20,635	₱190,480
60 months	₱17,402	₱244,120

Average of the total add-on rates published by the lenders we track for each term (6 or more lenders). Estimates, not offers; fees such as chattel mortgage and insurance are extra.

How do add-on rates convert to EIR? (worked table)

For bank car loans in 2026, the EIR is roughly 1.8 to 1.9 times the add-on rate spread per year. The table uses BPI's published brand-new car rates on ₱800,000 financed (₱1,000,000 car, 20% down). Our computed EIR matches the effective rates BPI publishes for every term.

Notice that the EIR rises only modestly with the term, but total interest in pesos almost sextuples between 12 and 60 months. Both numbers matter: EIR tells you the price of the money, and total interest tells you what it costs your budget.

What does Philippine law require lenders to disclose?

The Truth in Lending Act (Republic Act 3765, 1963) requires every lender to give you a written disclosure of the full cost of credit before the loan is completed. That includes the amount financed, the finance charges in pesos, and the rate of interest on a simple annual basis.

BSP Circular 730, issued in 2011 and effective in 2012, tightened these rules for banks:

1. The disclosure statement must show the effective interest rate, computed on the net loan proceeds, using the outstanding-balance method.
2. Interest must be computed on the balance outstanding at the start of each period. News reports at the time described this as ending flat-rate quotes that make a loan look cheaper than its true cost.
3. The borrower must receive a copy of the disclosure statement before the transaction is consummated.
4. Breaking the disclosure rules exposes lenders to sanctions under Section 6 of RA 3765.

The BSP also released worked EIR calculation models for common loan types (Memorandum M-2011-040). The SEC has applied the same EIR approach to lending and financing companies, which matters if you take in-house or financing company credit rather than a bank loan.

Why do fees and payment timing change the EIR?

The EIR is computed on what you actually receive, so anything you pay upfront raises it. If ₱10,000 of fees is deducted or paid at booking on our ₱800,000, 60-month example, the net proceeds are ₱790,000 for the same ₱17,468 payments, and the EIR rises from 11.19% to about 11.74%. At ₱20,000 of upfront charges it is about 12.3%.

Payment timing matters too. Rates "in arrears" mean your first payment is a month after release. Metrobank, Security Bank and EastWest also publish lower add-on rates for paying one month in advance, but paying in advance means you hold the money for a shorter time, so a lower add-on does not automatically mean a lower EIR. Compare the EIR on the disclosure statement.

How should you compare car loan offers?

Compare the same amount financed and the same term on three numbers: monthly payment, total amount paid, and EIR including fees.

EIRs here are computed by Kuhana from each bank's published add-on rate before fees; Metrobank's own disclosed effective rate for this term (10.93%) matches. Live rates for every term are on the chart below and on our financing page.

• Bank of Commerce27.54%
• East West Banking Corporation30.24%
• Metropolitan Bank & Trust Company30.26%
• Bank of the Philippine Islands31.01%
• Rizal Commercial Banking Corporation31.01%
• Rizal Commercial Banking Corporation31.01%
• Security Bank32.52%

Total add-on rate over the whole term, as published by each lender (latest check 13 November 2026). Lower is cheaper. Rates change and depend on your profile; see the calculator for your numbers.

A checklist when a dealer offers "low DP" or "0% interest":

• Ask for the cash price. If the promo price is higher than the cash price, the difference is interest.
• Ask whether insurance, chattel mortgage fees and LTO registration are paid upfront or added to the amount financed, where they earn add-on interest.
• Ask for the EIR in writing.
• Run the numbers in the car loan calculator or motorcycle loan calculator.

Motorcycle loans show the gap even more starkly. BPI's regular motorcycle loan publishes a range of 2.43% to 2.88% add-on per month, which is 29.16% to 34.56% add-on in a single year. For the full process of taking a car loan, see how car loans work in the Philippines and the motorcycle loan guide.