Concern:
Hello, good evening. I have a question. I took out a loan with Home Credit and was supposed to pay it off over two years. However, this month, I haven’t been able to make a payment yet. My concern is that the interest continues to grow every day. Is this legal?

∇ Legal Contemplator

Let’s carefully unpack this situation, starting with the foundational elements of loan agreements, interest accrual, and the regulatory environment in the Philippines.

Step 1: Setting the Stage – Understanding the Basics of Loan Agreements
When a borrower takes out a loan, they enter into a contractual agreement with the lender. In the Philippines, agreements like those with Home Credit typically include terms specifying:

The loan principal (amount borrowed),
The interest rate (percentage charged on the principal as the cost of borrowing),
Payment schedule (how and when payments are due),
Penalties for late or missed payments, and
Other fees (e.g., service fees, administrative fees).

Home Credit and similar institutions are regulated by the BSP (Bangko Sentral ng Pilipinas), which oversees compliance with laws like the Truth in Lending Act (RA 3765). This law mandates that borrowers must be informed of all terms and conditions upfront, including interest rates, computation methods, and penalty charges.

Question: Is it possible that the interest accumulating daily is explicitly stated in the agreement?
I must assume for now that Home Credit, being a major financial entity, disclosed these terms before the loan was granted. Still, did the borrower fully understand these terms? There’s always a chance the disclosure wasn’t as clear as required by law.

Step 2: Exploring the Legality of Daily Interest Accrual
Interest, whether computed daily, monthly, or annually, is not inherently illegal. The key legal questions are:

Was the method of interest calculation clearly stated and agreed upon in the loan agreement?
- Lenders often calculate interest using simple interest (fixed rate applied to the principal) or compound interest (interest applied to both the principal and any accumulated interest).
- For example, daily interest accrual could be a simple formula where the daily rate = annual interest ÷ 365 days.
Is the interest rate within legal limits?
- The BSP does not set a universal cap on interest rates but expects financial institutions to charge reasonable rates that reflect fair market practices.
- Excessive rates could potentially be challenged under laws against usury, though this depends on the circumstances.
Are penalty fees for late payments reasonable?
- The Consumer Act of the Philippines (RA 7394) protects borrowers from unconscionable or abusive practices. If penalties or additional charges are excessive, they might be considered illegal.
- What constitutes “excessive” is often subjective and requires case-by-case analysis.

Doubt: Is the borrower’s concern primarily about the interest rate itself or additional penalties for late payment? This distinction matters, as one might be legal while the other might not.

Step 3: Evaluating Potential Remedies for the Borrower
Let’s consider possible courses of action:

Request clarity from Home Credit.
- The borrower should review their loan agreement to verify if daily interest was explicitly mentioned.
- If unclear, they can request a breakdown of charges (principal, interest, penalties). Financial institutions are required to provide transparent explanations under the BSP’s regulations.
Negotiate for leniency.
- Lenders often have hardship programs or flexible payment arrangements for borrowers facing temporary financial difficulty.
- Could Home Credit temporarily halt interest accumulation or reduce penalty fees? It might depend on the borrower’s repayment history.
File a formal complaint if terms are abusive or unclear.
- If the borrower feels the charges are unreasonable or unfair, they can escalate the issue to the BSP Financial Consumer Protection Department or the DTI (Department of Trade and Industry) for mediation or investigation.

Uncertainty: What if the daily interest is compounded and disproportionately burdens the borrower? While this could be legal if disclosed, it may still merit review under the lens of fairness.

Step 4: Considering Broader Ethical Implications
Let’s take a step back. While focusing on legality, the ethical responsibilities of lenders are equally important. Institutions like Home Credit target consumers who often have limited financial literacy. This creates an asymmetry of knowledge, potentially leading borrowers to misunderstand terms.

Should lenders simplify their communication? Yes. But do they? Not always.
Can borrowers be blamed entirely for not understanding complex financial jargon? Not entirely.

Here lies a broader tension: financial access vs. exploitation risk.

Step 5: Potential Dead Ends and Questions Left Unanswered

Was the borrower explicitly informed of the daily interest structure?
- If not, there might be grounds for legal recourse.
Is the daily interest part of a compounding scheme, or is it a penalty rate?
- Compound interest could be seen as exploitative if the borrower’s financial situation is deteriorating.
What is the total effective annual interest rate (EIR) when all charges are factored in?
- BSP regulations require disclosure of the EIR. If hidden fees inflate the true cost of borrowing, that’s problematic.

Conclusion and Final Answer
To determine the legality of daily interest accrual in your Home Credit loan:

Review your loan agreement for details about interest calculation and penalties.
Check if the charges align with the terms disclosed when you took out the loan.
If unclear or seemingly unfair, contact Home Credit for a detailed breakdown.
If you believe the terms were not fully disclosed or are excessive, file a complaint with the BSP or DTI.

While daily interest is not inherently illegal, it must be transparent, reasonable, and in compliance with Philippine lending laws.