Effective Interest Rate Calculation Models for All Types of Loans

April 25, 2012 BSP MEMORANDUM NO. M-2012-020 TO : Entities with Credit-Granting Facilities Not Covered by Existing Issuances on the Truth in Lending Act by the Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC), Insurance Commission (IC) and Cooperative Development Authority (CDA) SUBJECT : Effective Interest Rate Calculation Models for All Types of Loans Relative to the implementation of Circular No. 755 dated 20 April 2012 on implementing guidelines of Republic Act. No. 3765, the Truth in Lending Act, to entities with credit-granting facilities not covered by existing issuances on the Truth in Lending Act by the BSP, SEC, IC and CDA, Effective Interest Rate (EIR) calculation models illustrative of common loan features are presented herewith (Annexes A to E) for guidance. It is understood that an EIR calculation model, founded on established principles of discounted cash flow analysis, should be based on the actual loan features. Subject entities shall be solely responsible for the propriety and accuracy of the EIR calculation model. However, for purposes of determining compliance with Circular No. 755, the BSP's determination of the reasonableness and accuracy of an EIR calculation model prevails. (SGD.) NESTOR A. ESPENILLA, JR. Deputy Governor ANNEX A Illustration 1 Effective Interest Calculation Model Fixed Equal Amortization Case A B C D E F G 1 Loan Amount 120,000.00 2 Monthly Installment 11,001.60 3 Contractual Rate (Monthly) 1.50% 4 Other Charges 3.00% 5 No. of Monthly Installment 12 6 7 Installment Gross Other O/S 8 Period Loan Principal Interest Charges Cash flows Balance 9 120,000.00 120,000.00 10 0 3,600.00 116,400.00 120,000.00 11 1 9,201.60 1,800.00 (11,001.60) 110,798.40 12 2 9,339.62 1,661.98 (11,001.60) 101,458.78 13 3 9,479.72 1,521.88 (11,001.60) 91,979.06 14 4 9,621.91 1,379.69 (11,001.60) 82,357.15 15 5 9,766.24 1,235.36 (11,001.60) 72,590.91 16 6 9,912.74 1,088.86 (11,001.60) 62,678.17 17 7 10,061.43 940.17 (11,001.60) 52,616.74 18 8 10,212.35 789.25 (11,001.60) 42,404.39 19 9 10,365.53 636.07 (11,001.60) 32,038.86 20 10 10,521.02 480.58 (11,001.60) 21,517.85 21 11 10,678.83 322.77 (11,001.60) 10,839.01 22 12 10,839.01 162.59 (11,001.60) - 23 Total 120,000.00 12,019.19 3,600.00 ========= ========= ========= Monthly Installment = PMT(C3,C5,-C1) * -1 = 11,001.60 (using Excel PMT Function) ======== Effective Annual Interest Rate (EIR) = (1+IRR(F10:F22)) 12 - 1 = 26.71% (using Excel IRR Function) Effective Monthly Interest Rate (MIR) = IRR(F10:F22) = 1.99% (using Excel IRR Function) ANNEX B Illustration 2 Effective Interest Calculation Model Fixed Principal Amortization Case A B C D E F G 1 Loan Amount 120,000.00 2 Monthly Installment 10,000.00 3 Contractual Rate (Monthly) 1.50% 4 Other Charges 3.00% 5 No. of Monthly Installment 12 6 7 Installment Gross Other O/S 8 Period Loan Principal Interest Charges Cash flows Balance 9 120,000.00 120,000.00 10 0 3,600.00 116,400.00 120,000.00 11 1 10,000.00 1,800.00 (11,800.00) 110,000.00 12 2 10,000.00 1,650.00 (11,650.00) 100,000.00 13 3 10,000.00 1,500.00 (11,500.00) 90,000.00 14 4 10,000.00 1,350.00 (11,350.00) 80,000.00 15 5 10,000.00 1,200.00 (11,200.00) 70,000.00 16 6 10,000.00 1,050.00 (11,050.00) 60,000.00 17 7 10,000.00 900.00 (10,900.00) 50,000.00 18 8 10,000.00 750.00 (10,750.00) 40,000.00 19 9 10,000.00 600.00 (10,600.00) 30,000.00 20 10 10,000.00 450.00 (10,450.00) 20,000.00 21 11 10,000.00 300.00 (10,300.00) 10,000.00 22 12 10,000.00 150.00 (10,150.00) - 23 Total 120,000.00 11,700.00 3,600.00 ========= ======== ======== Effective Annual Interest Rate (EIR) = (1+IRR(F10:F22)) 12 - 1 = 26.91% (using Excel IRR Function) Effective Monthly Interest Rate (MIR) = IRR(F10:F22) = 2.01% (using Excel IRR Function) ANNEX C Illustration 3 Effective Interest Calculation Model Fixed Equal Amortization Case with Grace Period A B C D E F G 1 Loan Amount 120,000.00 2 Monthly Installment 11,001.60 3 Contractual Rate (Monthly) 1.50% 4 Other Charges 3.00% 5 No. of Monthly Installment 12 6 (2 months grace period on principal and interest payments) 7 Installment Gross Other O/S 8 Period Loan Principal Interest Charges Cash flows Balance 9 120,000.00 120,000.00 10 0 3,600.00 116,400.00 120,000.00 11 1 - 120,000.00 12 2 - 120,000.00 13 3 9,201.60 1,800.00 (11,001.60) 110,798.40 14 4 9,339.62 1,661.98 (11,001.60) 101,458.78 15 5 9,479.72 1,521.88 (11,001.60) 91,979.06 16 6 9,621.91 1,379.69 (11,001.60) 82,357.15 17 7 9,766.24 1,235.36 (11,001.60) 72,590.91 18 8 9,912.74 1,088.86 (11,001.60) 62,678.17 19 9 10,061.43 940.17 (11,001.60) 52,616.74 20 10 10,212.35 789.25 (11,001.60) 42,404.39 21 11 10,365.53 636.07 (11,001.60) 32,038.86 22 12 10,521.02 480.58 (11,001.60) 21,517.85 23 13 10,678.83 322.77 (11,001.60) 10,839.01 24 14 10,839.01 162.59 (11,001.60) (0.00) 25 Total 120,000.00 11,533.84 3,600.00 ========= ======== ======= Monthly Installment = PMT(C3,C5,-C1) * - 1 = 11,001.60 (using Excel PMT Function) ======== Effective Annual Interest Rate (EIR) = (1+IRR(F10:F24)) 12 - 1 = 19.68% (using Excel IRR Function) Effective Monthly Interest Rate (MIR) = IRR(F10:F24) = 1.51% (using Excel IRR Function) ANNEX D Illustration 4 Effective Interest Calculation Model Case: Periodic Interest Payment, Balloon Payment at Maturity A B C D E F G 1 Loan Amount 120,000.00 2 Monthly Installment 1,800.00 (Interest Only) 3 Contractual Rate (Monthly) 1.50% 4 Other Charges 3.00% - 5 No. of Monthly Installment 12 6 7 Installment Gross Other O/S 8 Period Loan Principal Interest Charges Cash flows Balance 9 120,000.00 120,000.00 10 0 3,600.00 116,400.00 120,000.00 11 1 1,800.00 (1,800.00) 120,000.00 12 2 1,800.00 (1,800.00) 120,000.00 13 3 1,800.00 (1,800.00) 120,000.00 14 4 1,800.00 (1,800.00) 120,000.00 15 5 1,800.00 (1,800.00) 120,000.00 16 6 1,800.00 (1,800.00) 120,000.00 17 7 1,800.00 (1,800.00) 120,000.00 18 8 1,800.00 (1,800.00) 120,000.00 19 9 1,800.00 (1,800.00) 120,000.00 20 10 1,800.00 (1,800.00) 120,000.00 21 11 1,800.00 (1,800.00) 120,000.00 22 12 120,000.00 1,800.00 (121,800.00) - 23 Total 120,000.00 21,600.00 3,600.00 ========= ======== ======= Effective Annual Interest Rate (EIR) = (1+IRR(F10:F22)) 12 - 1 = 23.58% (using Excel IRR Function) Effective Monthly Interest Rate (MIR) = IRR(F10:F22) = 1.78% (using Excel IRR Function) ANNEX E Illustration 5 Effective Interest Calculation Model Fixed Equal Amortization Case (Weekly Installments Quoted In Monthly Effective Rate) A B C D E F G 1 Loan Amount 10,000.00 2 Weekly Installment 788.00 3 Contractual Rate (Monthly) 1.50% 4 Weekly Compounding Rate 0.35% 5 Other Charges 3.00% 6 Term (Weeks) 13 7 Period/Year 52 8 Installment Gross Other O/S 9 Period Loan Principal Interest Charges Cash flows Balance 10 10,000.00 10,000.00 11 0 300.00 9,700.00 10,000.00 12 1 753.38 34.62 (788.00) 9,246.62 13 2 755.99 32.01 (788.00) 8,490.63 14 3 758.61 29.39 (788.00) 7,732.02 15 4 761.23 26.76 (788.00) 6,970.78 16 5 763.87 24.13 (788.00) 6,206.91 17 6 766.51 21.49 (788.00) 5,440.40 18 7 769.17 18.83 (788.00) 4,671.24 19 8 771.83 16.17 (788.00) 3,899.41 20 9 774.50 13.50 (788.00) 3,124.91 21 10 777.18 10.82 (788.00) 2,347.72 22 11 779.87 8.13 (788.00) 1,567.85 23 12 782.57 5.43 (788.00) 785.28 24 13 785.28 2.72 (788.00) (0.00) 25 Total 10,000.00 243.98 300.00 ======== ====== ====== Weekly Installment = PMT(C4,C6,-C1) * - 1 = 788.00 (using Excel PMT Function) Effective Annual Interest Rate (EIR) = (1+IRR(F10:F24)) 52 - 1 = 50.46% (using Excel IRR Function) Effective Monthly Interest Rate (MIR) = (1+IRR(F10:F24)) 13/3 - 1 = 3.46% (using Excel IRR Function)