Manila, Philippines

How to Convert Add On Rate to Effective Rate in Loans: Plus Usual Bank Loan Rates in Philippines

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We have been talking about loans quite a lot in this website.

Loans are not necessarily bad, as long as you use it for purchase of assets and investments, those that can make more money, or appreciate in value in the long run. Loans can be bad if these are used for expenses and wants, those items that depreciate in value fast. Of course, emergencies may also drive one into getting loans, but ideally not so much loans, that’s why we need to put up emergency funds and insurance to cover us.

Back to effective yield (EY) and add-on rate (AOR).

Both AOR and EY refer to the interest charged to a loan, just expressed in different terms. One is usually monthly (AOR) while the other is effective annual rate (EY). Nonetheless, this will result to the same interest amount to be paid, after some conversion, using the downloadable calculator at the end of this article.

In this video in our YouTube channel, we discussed the following about AOR and EY:

  • The basics about EY and AOR, and what’s the key differences
  • How to spot which one is which, in loan offers and promotions
  • How to convert EY into AOR, and vice versa (using downloadable calculator at the end of this article)
  • The usual bank loan interest rates in the Philippines, expressed in both EY and AOR

Watch the video:

So, the next time you go shopping for loans, or see credit card promos, or get a bank loan, aside from knowing the AOR, you should also know the EY, so you’re better able to assess whether the interest is reasonable or not. Next time, ask the telemarketer, not just the AOR, but also the EY.

Here’s a table of equivalence for the usual AORs offered, and the equivalent EY, based on loan tenor:

Meanwhile, here’s the estimated interest rate for a 100K loan, using the various AOR and loan tenor combinations:

Here’s a recap of the usual bank loan interest rates, depending on product:

Lastly, as promised, below is the downloadable Excel calculator to help you convert AOR to EY, and vice versa.

Click to Download File: Effective Yield and Add-On Rate Converter_InvestMoneyPH

Image from Pixabay and Lumen 5.

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