From Loan Sharks to Legit Loans: A Practical Guide for Filipinos Transitioning to Formal Credit

• • Why Move from Informal to Formal Credit

• • Assessing and Preparing Your Finances

• • Exploring Safer Formal Credit Options

• • Building Good Habits and Community Support

Time for a Change

Office cleaning lady Ana Perez is determined to get her salary ATM from an informal lender who works in another department. She had to surrender her ATM as a requirement of the informal lender, whom she refused to name.

“Nanghiram kasi ako nh Php20,000 para sa pinagpaosital ng asawa ko. Kailangan ko ibigay un ATM ko sa kanya kasi ganun patakran nya para sa oras daw ang bayad. (I borrowed Php20,000 from her to pay for an emergency medical bill, and she required me to give her my salary ATM so she is assured that I can pay her on time),” Ana shares. Ana receives Php12,000 a month as a permanent cleaning staff member of a Makati-based office. This means she will pay Php6,000 for her debt every month because of the interest fee at 5% payable in 10 months. She has no less than Php3000 left for her personal needs, such as daily fare and food expenses.

“Naghiram na ulit ako sa kapatid ko para pambili ng gamit sa eskwela ng anak ko. (I have to borrow from my sister to buy my son’s school supplies),” adds Ana.

For millions of Filipinos, borrowing money has long meant knocking on a neighbor’s door, approaching the market’s 5-6 collector, or asking a relative for a cash advance. Informal lenders are convenient, but they often charge steep interest and trap families in unending debt cycles.

If you’ve ever wondered how to escape that cycle and tap into safer, more affordable credit sources, you’re not alone. Transitioning from informal lending to formal credit isn’t just a financial upgrade—it’s a step toward security, growth, and peace of mind. This guide lays out practical steps to make the transition—and includes insights from finance professionals who’ve seen this journey firsthand.

Step 1: Understand Why Formal Credit Matters

Formal credit sources—such as banks, cooperatives, microfinance institutions, and licensed digital lenders—are regulated by the Bangko Sentral ng Pilipinas (BSP). They follow caps on interest rates, provide clearer terms, and help build your credit history.

“When you borrow formally, you’re not just getting money; you’re building a track record that opens doors to bigger opportunities later on,” says Maria Theresa Lagman, a credit risk analyst at a leading microfinance institution.

In contrast, informal lenders are unregulated. Their high interest rates and unpredictable terms can keep you paying indefinitely. Transitioning to formal credit allows you to break free from this cycle.

Step 2: Check Your Financial Standing

Before approaching formal lenders, get a clear picture of your finances.

1. 1. List all your current debts. How much do you owe, to whom, and what are the interest rates?

1. 1. Review your income and expenses. How much can you realistically set aside each month to repay a loan?

1. 1. Get a credit report. Under Philippine law, you’re entitled to a copy of your credit report from the Credit Information Corporation (CIC) or accredited bureaus like TransUnion or CIBI. Check for errors and start addressing any red flags. By downloading the Credit Kaagapay app, you can obtain a free copy of your credit report.

“It’s like going to the doctor for a check-up. You need to know where you stand before you can fix anything,” explains Paolo Francisco, a financial literacy trainer in Quezon City.

Step 3: Start Small with Formal Credit Products

Shifting doesn’t mean taking a big bank loan immediately. Start with small, manageable products:

• • Microfinance Loans
    Organizations like CARD MRI, ASA Philippines, and Tulay sa Pag-unlad (TSPI) provide small loans designed for micro-entrepreneurs. Interest rates are transparent, and payment terms are realistic.

• • Cooperative Loans
    Joining a cooperative in your barangay or municipality allows you to build savings and borrow at reasonable rates. Cooperatives often provide financial education as part of their services.

• • Government Programs
    The Department of Trade and Industry’s Pondo sa Pagbabago at Pag-asenso (P3) program offers affordable micro-loans to help wean small borrowers from informal lenders.

“The P3 program is specifically designed to compete with ‘5-6’ lending by giving people a fair chance,” says Noel Ruiz, a field officer with Small Business Corporation.

Step 4: Consider Regulated Digital Lending Apps

Fintech platforms have changed the landscape. Apps like GCash GCredit, Tonik, Mocasa, and Maya Credit offer personal loans or credit lines with clear terms, instant approvals, and digital records.

• • Advantages:
    ✅ Transparent interest rates
    ✅ Quick processing with minimal paperwork
    ✅ Builds your digital credit footprint

• • Be careful:
    ✔️ Download only from official app stores.
    ✔️ Choose BSP‑licensed lenders (check the BSP website).
    ✔️ Avoid apps that ask for unnecessary permissions or hidden fees.

“Fintech gives access to people who have never set foot in a bank, but you must still read the fine print,” warns Jessa Velarde, a fintech compliance officer. “Sometimes, exorbitant loan interests are also at stake.”

Step 5: Prepare a Simple Plan Before Borrowing

Formal lenders will appreciate a plan that shows you’re ready to handle the loan responsibly:

• • Why do you need the loan? Be specific—school fees, business supplies, or equipment.

• • How much do you really need? Borrow only what you can repay.

• • What’s your repayment strategy? Show that you’ve considered timelines and cash flow.

Even a short written plan shows you’re serious, and many microfinance officers will help you refine it.

Step 6: Build Repayment Discipline

Switching to formal credit only works if you build good habits:

• • Pay on or before the due date.

• • Set reminders or automate payments.

• • Track your payments and receipts.

Avoid overlapping loans—finish one before taking another.

“Your first formal loan is your chance to prove yourself. Timely repayment builds trust and unlocks larger loans in the future,” emphasizes Ramon Uy, a rural bank loan officer in Davao.

Step 7: Leverage Community Support

Transitioning alone can feel overwhelming, but you don’t have to do it by yourself.

• • Attend financial literacy sessions offered by cooperatives, churches, or NGOs.

• • Join a savings group in your barangay; many evolve into cooperatives.

Share your experience with neighbors—success stories often inspire others to follow.

“We see whole communities break free from loan sharks when they learn together,” says Lourdes Garcia, a community development worker in Cebu.

The Road Ahead: From Borrower to Builder

Shifting from informal lending to formal credit sources is more than a financial decision—it’s a mindset change. It’s about moving from short-term fixes to long-term stability.

Yes, informal lending feels easier at first. But it often comes with hidden costs that drain your resources and trap you in a cycle of repayment. Formal credit, while requiring more preparation and documentation, gives you safer terms, legal protection, and a path to build your financial reputation.

“A year ago, I relied on a ‘5-6’ lender every month,” shares Carmela Santos, a small sari-sari store owner in Laguna. “Then I joined a cooperative, got a small loan, and now I’m saving for my own delivery tricycle. I sleep better knowing I’m not afraid of collectors anymore.”

Final Takeaway

Breaking free from informal lenders isn’t just about paying less interest—it’s about regaining control of your financial future. By understanding your finances, starting small, exploring regulated options, and practicing repayment discipline, you can build a credit history that opens doors to better opportunities.

Your journey from informal to formal credit starts with one decision today. Take that step, and you’re not just borrowing smarter—you’re investing in a brighter future. Download the Credit Kaagapay app to learn more about your financial plans for the future.