There seems to be a lot of mystery surrounding applying for a loan from banks and financing companies in the Philippines. For a pretty straightforward financial transaction, a lot of Filipinos are unfamiliar with the process. Unanswered questions such as “Do I qualify for a bank loan?” give rise to hesitation to transact with formal lending institutions.
Perhaps this is one of the reasons why only about 2% of Filipinos borrow money from banks compared to 4.74% who borrow from informal lenders, according to a 2015 Bangko Sentral ng Pilipinas survey. According to the survey, registered lending or financing companies (5.74%) and private individuals such as family members or friends (29%) are still our biggest loan source.
So how do you know if you’re qualified for a loan with banks or financing companies? Or better yet, how do you increase your chances of getting a loan from these institutions? The answer may shock you.
So what is the biggest secret in getting your loan approved by banks and financing companies?
The answer is simple: borrow money from a legitimate lender. Before you hit the back button, let me elaborate a little.
When deliberating whether or not to lend you money, financing companies and banks ask themselves a single question: “Will this person pay the loan and interest back and on time?” In other countries such as the U.S., they find the answer in your credit score. A credit score is a number assigned by a credit bureau representing your credit worthiness, based on your credit transactions. Although there has been push for it, there is still no unified credit scoring system in the Philippines. However, lenders DO rely on your credit history as a basis for approving your loan.
Simply put, to borrow money from banks and financing companies, you have to establish a history of being a responsible borrower who can successfully manage debt. Now comes the second question: how can I get my first loan so I can establish my credit? How do I start building a credit history without a credit history?
First you should realize the difference between two kinds of loans: installment and revolving. Installment loans are loans that you avail of once. Examples of this would be your home and car loans. Revolving loans, on the other hand, are those that you can use again and again. You borrow money up to an agreed credit limit, pay back, and borrow again. Credit cards fall under the latter category.
To establish your credit, you can start by getting a credit card and using it only for your regular monthly expenses. For instance, you can use your credit card to pay for your groceries and gas. The key here is to pay back on time. Doing this will show that you have stable, predictable expenses AND the character to repay your loan responsibly.
You can also try to apply for a small, short-term loan that you won’t have a problem paying back. For instance, you can get a modest personal loan from banks or financing companies for a planned expense, such as your child’s tuition fee. Just be sure to pay the amount promptly every month. Again the point is to deliberately build your credit history. You will enjoy much lower interest rates too (1.2% to 2.0% monthly) compared to informal lenders (who usually charge 20% per month).