It's the most common loan-shopping mistake: comparing two rates that are quoted on completely different bases. A 0.5% monthly add-on rate looks like 6% a year (0.5% × 12), so surely it beats a loan at 12% per annum — right? Not quite. Once you put both on the same footing, the gap almost disappears.
The problem is that an add-on rate charges interest on the full original amount for the whole term, even as you pay the balance down. So its real cost — the effective annual rate (EAR) — is roughly double the headline figure. (We explain why in detail in how monthly add-on interest works.) A 0.5% monthly add-on (6% on paper) actually works out to about 11–12% EAR.
A rate quoted as '12% per annum' usually means a diminishing-balance rate: interest is charged only on what you still owe, which shrinks every month. That is much closer to the true effective rate — around 12–12.7% EAR depending on how it's compounded.
Let's put real numbers on it. Borrow ₱100,000 over 12 months:
• 0.5% monthly add-on: interest = ₱100,000 × 0.5% × 12 = ₱6,000. You repay ₱106,000, about ₱8,833 a month. True cost ≈ 11.6% EAR.
• 12% p.a. diminishing balance: interest ≈ ₱6,620. You repay ₱106,620, about ₱8,885 a month. True cost ≈ 12.7% EAR.
So the 0.5% add-on is the cheaper of the two here — but only by about ₱620 over the year, not the 'half price' the 6%-vs-12% framing suggests. The naive comparison overstates the saving by roughly ten times.
And the result can flip. Add-on loans get relatively more expensive on longer terms (the 'you owe less but still pay full interest' effect grows), and processing or notarial fees can swing the total either way. A 0.5% add-on over 36 months is far pricier in EAR terms than over 12 months, even though the monthly rate is identical.
The takeaway: never compare a monthly add-on rate against an annual rate directly. Convert both to EAR first. Every offer in the loans table shows its EAR next to the headline rate, and the loan calculator estimates your real monthly payment for the amount and term you choose — so you can compare the number that actually reflects what you'll pay.