A first-time borrower’s playbook

radar runs down what you need to know about your first loan, with some expert input.

Taking out a loan to cover personal goals or life milestones can be tempting, but it’s important not to jump in without understanding the risks.

Loans aren’t always the bad guys they’re made out to be—as long as you know where your money’s going and what pitfalls to avoid.

Consumer loans in the Philippines grew by around 24% year-on-year as of April 2025—among the fastest in Asia—according to the Bangko Sentral ng Pilipinas (BSP). 

Financial analysts say this increase reflects a shift in how Filipinos approach credit—turning to loans not just for personal milestones, but also to fund small business ventures.

For first-time borrowers, this growing access to credit can be both an opportunity and a risk—especially without a clear repayment plan.

radar breaks down what first-time borrowers should know before taking out a loan.

To loan or not to loan

Taking out a loan to fund personal goals or life milestones can be tempting. Whether it’s the latest smartphone, a new home, an SUV, or starting a dream business, there are loan options for almost every need.

However, financial consultant Kristin Militante-Lucas warns not to be swayed without carefully assessing one’s financial capacity and the risks involved.

“Anyone who intends to take out a loan should carefully assess their financial standing. It’s not enough to be employed or to have a regular source of income,” Lucas, who also teaches accounting at Ateneo de Manila University, told radar in an exclusive interview.

Savings and investments should come first, she said. Without either, it’s best to avoid taking out loans, especially for nonessential expenses.

But if a loan becomes absolutely necessary—such as for a medical emergency—Lucas advises maximizing existing assets that can generate money.

“I would suggest liquidating or selling some of your assets first before taking out a loan, especially if your stream of income is erratic or uncertain,” she said.

Otherwise, it can be easy to fall into debt traps—or take out additional loans in order to pay existing loans. 

Another way to assess borrowing capacity is through a credit score. The Credit Information Corporation of the Philippines (CIC) defines this as a summary of financial transactions submitted to the CIC, such as loans and credit card spending. Without a history of these transactions, no credit score exists. Some institutions, including government agencies, lending apps, and certain banks, still offer loans without a credit score. A negative score, however, makes it less likely for banks and other institutions to approve a loan. 

What goes into loans

When venturing into loans, it’s important to keep a simple math equation in mind:

Interest = Principal x Rate x Time

“Don’t merely rely on the computations given by the lending body. It is necessary that you understand the computations on your own,” said Lucas. Each part of the equation represents a factor to consider when taking out loans.

Interest is what the loan costs over time. Principal is the amount borrowed, and the rate determines how quickly interest accumulates. 

Interest is often where loans become tricky. When not paid on time, loans incur more interest and can become worth more than the actual amount that was borrowed. 

Lucas emphasized that borrowers must pay back the principal by the maturity date in order to avoid additional costs. “Even though this is at the end of the time period of the loan, it is necessary to make sure that it is paid when it falls due,” she said.

Know the interest rate and percentage rate

It is important to carefully assess the rate a lender offers when taking out a loan. Firstly, distinguish between effective interest rate (EIR) and annual percentage rate (APR). The Center for Financial Inclusion defines APR as the actual interest rate, while EIR includes the APR plus other compounding expenses that lending institutions may charge. Always check the EIR to ensure all other payables.

Additionally, clarify with lenders whether they charge interest rates monthly, annually, or by some other period. Four percent per annum (per year) can be vastly different from 4% per month, which translates into 48% a year.

“I highly suggest that people who intend to borrow look into the rate and the peso value of the interest that needs to be paid per period. Sometimes, just looking at one of these may seem affordable, even when they are not,” said Lucas.

Lucas also advised that up to 28% of one’s income should go into loan repayment. Any amount higher than that may risk the borrower falling into a debt trap.

What is a good debt

Though avoiding long-term debt is the goal, Lucas said that there can be “good” debt. “[It exists] if the money borrowed earns more than the interest being paid. This is especially true for borrowers who borrow to fund their businesses,” she said.

For business owners, loans can be a tool for growth. Borrowing to fund equipment, inventory, or expansion projects may yield returns higher than the cost of interest, turning debt into a strategic investment rather than a liability.

A simple benchmark: if the loan can generate more income than its interest cost, it may be worth considering—but careful planning and realistic projections are key.

For many Filipinos, especially those starting microenterprises, responsible borrowing can be the bridge between financial struggle and long-term stability.

Loans are what they are made of. They can be a lifeline when savings fall short, but they can also lead to financial trouble if losses are not carefully monitored. Maximizing loans requires self-discipline—paying on time and recognizing when borrowing may exceed financial capacity. When managed properly, the benefits can pay off in the long run.

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