Kash Avena
Know the dangers of getting an informal quick cash loan or other unregulated types of loan, before you dig yourself too deep.
When faced with a difficult financial need where our livelihoods, lifestyles, or very lives are on the line, a number of us turn to informal lenders for a quick cash loan or salary loan. In fact, according to the World Bank’s Global Findex Database for 2014, 10% of Filipinos seek loans from informal lenders compared to the worldwide average of 5%.
This is in spite of bank loans growing in double digits this year, with the Bangko Sentral ng Pilipinas (BSP) reporting a 40.6% growth of salary-based consumption loans (P48.17 billion from P34.26 billion). Banks have been taking measures to ensure that consumers can count on them for a quick cash loan by cutting down processing times and lowering their interest rates. However, due to lending terms, conditions, and requirements such as a minimum income and financial documents, there are still consumers and small business owners who would rather turn to pautang or 5-6. These are people who deem themselves unbankable or unable to avail of financial services from banks or registered financing companies.
But what is wrong with getting a quick cash loan, salary loan, or 5-6 loan from an informal lender?
To be clear, there is nothing wrong with a quick cash loan or a salary loan per se. It’s where you avail of these loans that makes all the difference.
First it helps to define what an informal lender is. An informal lender is a person or an unregistered private lending business that lends money without the permission or regulation of the government. They are not to be confused with registered private lending companies, which operate within the Lending Company Regulation Act of 2007 (Republic Act 9474), which states that a company non-regulated by the law (including banks, savings and loan associations, or pawnshops) may only be a corporation granted authority by the Security and Exchange Commission. (SEC).
Second, we must distinguish between informal lenders who charge or don’t charge an interest. Simply put, there is virtually zero financial risk on the borrower’s end when borrowing money from family, relatives, or friends who do not charge interest (albeit the risk of conflict if the principal or loan amount is left unpaid or only partially paid). The potential comes from private individuals or unregistered companies who lend money for profit.
We’ve outlined the following dangers of getting an informal loan:
Outrageous interest rates
Informal lenders can charge as much as 20% per month. In fact, this is how the term 5-6 came to be. For every P5.00 you borrow, you have to pay back P6.00. This means that if you borrow P25,000, you’ll have to pay back P30,000. We’ve outlined just how much money you lose with a 20% monthly interest in a previous post. The amount will shock you.
Hidden or unclear fees and charges
Most of the time, informal predatory lenders will surprise you with hidden costs that you only discover once you are repaying your loan. There are also those who intentionally make the amount of interest to be paid vague for the borrower. The Truth in Lending Act (RA 3765) requires the lender to provide the borrower information regarding the loan amount and the interest in terms of a simple annual percentage and in pesos in “a clear statement in writing”.
Cycle of debt
Informal predatory lenders are more than willing to offer you loans that are impossible for you to pay back given your current income and assets. This is because the longer you fail to pay your loan on time, the larger the interest they get to take. You may end up borrowing another loan just to pay back your original loan. This cycle of debt affects 50% of borrowers in the U.S., with similar studies needing to be made in the Philippines.
How Can I Get a Formal, Legitimate Loan?
It really is not as complicated as would be first-time borrowers think. Read up on the loan criteria and requirements of banks and lending companies to know if you qualify. You can also use a loan calculator to see how much money you can borrow given your current income. Prepare all necessary documents for your loan application with a bank or financing company. You should also shop around for the best interest rates, as banks and lending companies vary on this.
Loansolutions – the Philippines #1 Loans Marketplace – can help you get that legitimate loan. Our 3-Step Online Loan Application is cross-referenced with the criteria of top banks and lenders in the Philippines, to make sure that we find lowest interest loans that you can qualify for. A dedicated Loansolutions Concierge will contact you to answer all your loan questions, and help review and submit the required documents to banks and lenders on your behalf. Because we stand against predatory lending, we only work with the biggest network of legitimate lenders in the Philippines.
