Consumer Credit Transaction

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Declaration of policy on credit transaction – The State is mandated to simplify, clarify, and modernize the laws governing credit transactions, as well as encourage the development of fair and economically sound consumer credit practices.[1] To protect the consumer from lack of awareness of the true cost of credit to the user, the State is to assure the full disclosure of the true cost of credit.[2]

Determination of finance charges – Except as otherwise provided, the amount of the finance charges in connection with any consumer credit transaction is to be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended and imposed directly or indirectly by the creditor as an accident to the extension of credit, including any of the following type of charges which are applicable: (a) interest or time price differential and any amount payable under point or other system of additional charges; (b) collection fees which include finder’s fees or similar charges; (c) credit investigation fees; (d) notarial fees, if any; and (e) premium or other charges for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss. The implementing agency is to determine what items are to be exempted from the computation of the finance charges.[3]

Determination of simple annual rate – The simple annual rate applicable to any extension of consumer credit is to be determined in accordance with the rules and regulations promulgated by the implementing agency.[4]

Delinquency charges – With respect to a consumer credit transaction other than one pursuant to an open-end credit plan, the parties may agree to a delinquency charge on any installment not paid in full on/or before the 10th day after its scheduled or deferred due date. [5]

Deferral charges – The parties in a consumer credit transaction may at any time agree in writing to a deferral of all or part of one or more unpaid installments and the creditor may make and collect a charge which is not to exceed the rate previously disclosed pursuant to the provisions on disclosure.[6] A deferral charge may be collected at the time it is assessed.[7]

Finance charge on refinancing – The parties may agree on a finance charge in an open-end credit plan based on the amount financed resulting from the refinancing or consolidation at a rate not exceeding that permitted by the rules promulgated by the implementing agency.[8]

Right to prepay – The person to whom credit is extended may prepay in full or in part, at any time without penalty, the unpaid balance of any consumer credit transaction. [9]

Same; Rebate on prepayment – Upon prepayment in full of the unpaid balance of a pre-computed consumer credit transaction, refinancing or consolidation, an amount not less than the unearned portion of the finance charge calculated according to the Consumer Act is to rebated to the person to whom credit is extended.[10]

General requirements on credit cost disclosure – Each creditor is to disclose, in accordance with the regulations of the implementing agency, to each person to whom consumer credit is extended, the disclosures required by the Consumer Act. [11]

Credit sale, required disclosures – Any creditor extending a consumer credit sale other than one pursuant to an open-end credit plan is to disclose in a statement to the extent applicable, the following information: (a) the cash price or delivered price of the property or service to be acquired; (b) the amounts, if any, to be credited as downpayment and/or trade in; (c) the total amount to be financed or the difference between the amounts set forth in the Consumer Act; (d) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (e) the finance charge expressed in terms of pesos and centavos; (f) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding balance of the obligation; (g) the effective interest rate; (h) the number, amount and due dates or periods of payments scheduled to repay the indebtedness; and (i) the default, delinquency or similar charges payable in the event of late payments.[12]

Required disclosure on open-end credit plan – Before opening any account under an open-end consumer credit plan, the creditor is to disclose, to the extent applicable, the following information: (a) the conditions under which a finance charge may be imposed, including the time period, if any, within which any credit extended may be repaid without incurring a finance charge; (b) the method of determining the balance upon which a finance charge may be imposed; (c) the method of determining the amount of the finance charges, including any minimum or fixed amount imposed as a finance charge; (d) where one or more periodic rates may be used to compute a finance charge, each such rate, the range of balances to which it is applicable, and the corresponding simple annual rate; and (e) the conditions under which the creditor may impose a security lien and a description of the goods to which such lien may attach.[13]

Required disclosures on consumer loans not under open-end credit plan – Any creditor extending a consumer loan or in a transaction which is neither a consumer credit sale nor under an open-end consumer credit plan is to disclose, to the extent applicable, the following information: (a) the amount of credit of which the debtor will have the actual use, or which is or will be paid to him or for his account or to another person on his behalf; (b) all charges, individually itemized, which are included in the amount of credit extended but which are not part of the finance charge; (c) the total amount to be financed or the sum of the amounts referred to in (a) and (b); (d) the finance charge expressed in terms or pesos and centavos; (e) the effective interest rate; (f) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation; (g) the default, delinquency or similar charges payable in the event of late payments; and (h) a description of any security interest held or to be held or to be retained or acquired by the creditor in connection with the extension of credit and a clear identification of the property to which the security interest relates.[14]

Form and timing of disclosure – All disclosures are to be made clearly and conspicuously in writing before the transaction is consummated.[15]

Periodic statement of charges – The periodic statement transmitted by the creditor in connection with any extension of consumer credit other than under an open-end consumer credit plan, are to be set forth with the following information: (a) the simple annual rate; (b) the effective interest rate; (c) the date by which, or the period, if any, within which payment must be made in order to avoid additional finance charges; and (d) method of determining the balance upon which the finance charge may be imposed.[16]

Exempted transaction – The foregoing requirements on consumer credit transactions does not apply to the following credit transactions: (a) those involving extension of credits for business or commercial purposes, or to the Government and governmental agencies and instrumentalities, juridical entities or to organizations, or (b) those in which the debtor is the one specifying the definite set of credit terms such as bank deposits, insurance contracts, sale of bonds or analogous transactions.[17]

Sale of consumer products on installment payment – In a consumer credit sale other than one pursuant to an open-end credit plan, the obligation of the consumer to whom credit is being extended is to be evidenced by a single instrument which must include, in addition to the disclosures required by this act, the signature of the seller and the person to whom credit is extended, the date it was signed, a description of the property sold and a description of any property transferred as a trade-in. [18] The instrument evidencing the credit is to contain a clear and conspicuous typewritten notice to the person to whom credit is being extended that: (a) he should not sign the instrument if it contains any blank space; (b) he is entitled to a reasonable return of the precomputed finance charge if the balance is prepaid; and (c) he is entitled to an exact, true copy of the agreement.[19]


[1] Ibid. Article 131.

[2] Ibid.

[3] R.A. 7394, Article 132.

[4] Ibid. Article 133.

[5] Ibid. Article 134.

[6] Ibid. Article 135.

[7] Ibid.

[8] R.A. 7394, Article 136.

[9] Ibid. Article 137.

[10] Ibid. Article 138. The unearned portion of the pre-computed finance charge on consumer transactions repayable in substantially equal successive installments is equal to at least that portion of finance charge which the sums of the installment balances of the obligation scheduled to be outstanding after the installment date nearest the date of prepayment bears to the sum of all installment balances originally scheduled to be outstanding under the obligation (Paragraph 2, Ibid.).

[11] R.A. 7394, Article 139. If there is more than one obligor, a creditor need not furnish a statement of information required under this Act to more than one of them (Paragraph 2, Ibid).

[12] Ibid. Article 140.

[13] Ibid. Article 141.

[14] Ibid. Article 142.

[15] Ibid. Article 143.

[16] Ibid. Article 144.

[17] Ibid. Article 145.

[18] Ibid. Article 146.

[19] Ibid. In cases where the instrument will be sold at a discount to a bank, financing company or other lender, the said transferee is subject to all claims and defenses which the debtor could assert against the seller of consumer products obtained hereto or with the proceeds thereof (Ibid.).

©2020 BUSINESSLAW.PH. All rights reserved. Statements and opinions of the author are of his own, and does not reflect any organization he may be connected or affiliated. All information herein are for educational and general information only. The content should not be considered as a legal advice or opinion. Please consult a lawyer to address your specific concerns.
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