A staggering 80% of us have had loans, with 43% of our lower-income earners. Loans are effective for wealth accumulation if it is used for productive purposes. However, low-income Filipino households or those bringing home less than PhP20,000 a month, usually borrow for non-productive purposes.

But why does our utang seem to pile up? There are personal factors and systemic factors.

Personal factors

On a personal level, many of us face increasing needs or wants as families grow and mature, although the Filipino household size has shrunk from the 70s. Like adding insult to injury, our income struggle to keep up. Wages, especially of the middle and low income classes have stagnated or even decreased. In a pinch, many turn to more loans as a quick fix – the perilous habit of solving debt with more debt, further entangling ourselves in the web of debt.

Systemic factors

An even greater challenge are systemic issues like inflation, minimal financial education, predatory lending terms, and the siren call of false advertising from financial institutions, and you’ve got the perfect storm for a debt disaster.

In 2014, the daily minimum wage in the National Capital Region (NCR) was set at PHP 466. By 2024, it had risen to PHP 530, marking an annual increase of 1.3%. However, during the same timeframe, the inflation rate averaged 3.5% annually. The rates may seem not to be significant, when adjusted for inflation, the equivalent wage required to purchase the same goods and services as a decade ago should be PHP 657.34. This analysis highlights a gap: minimum wage earners would need an increase of approximately 24% over the current rate to maintain their purchasing power compared to ten years ago.

Due to the lack of financial education in school curriculum, Filipinos turn to loans rather than savings, insurance or investments when financing for important life events such as education for a child, emergencies, medical costs, vacations etc. Add this to the fact that teachers both in the public and private schools are overburdened with debt themselves which makes them ill equipped to teach the same.

The Philippine financial system advertises accessing loans as a means to ‘achieve dreams,’ a dream car, a dream house, a dream vacation. It normalizes the thinking that it’s ok to spend now and need not worry about paying for these in the future because one “deserves” to be rewarded. It emphasizes instant gratification.

This is not to mention that lending companies that offer exorbitant interest rates are ubiquitous and are easily accessible. In banks, the barrier to accessing consumer loans is set low and could be done with relative ease. In contrast, accessing loans for productive purposes is ironically difficult.

Systemic more than personal

The systemic factors contributing to the Filipinos’ debt dilemma extend beyond individual choices, painting a broader picture of economic and societal challenges. The disparity between wage growth and inflation exacerbates the struggle to maintain a standard of living without resorting to loans.

The absence of comprehensive financial literacy programs in schools leaves many Filipinos ill-prepared to manage their finances effectively, making them more susceptible to the pitfalls of debt. This gap in education encourages a cycle of borrowing for immediate needs rather than building long-term financial security through savings, insurance and investments.

The marketing strategies of financial institutions and lenders play a significant role in shaping borrowing habits. The portrayal of loans as a quick fix to fulfill immediate desires for material possessions feeds into the culture of instant gratification. This narrative often overlooks the long-term financial implications of debt, leading individuals to make financial decisions that may not align with their best interests.

Predatory lending practices further complicate the issue. The prevalence of lenders offering loans with high interest rates and unfavorable terms targets vulnerable individuals, trapping them in a cycle of debt that can be difficult to escape. The accessibility of consumer loans through banks, with relatively low barriers to entry, contrasts sharply with the challenges of securing loans for productive purposes, such as starting a business or investing in education. This disparity underscores a systemic bias towards consumption over investment, hindering economic growth and individual financial stability.

Addressing these systemic factors requires a multifaceted approach, including reforming financial education, regulating lending practices, and aligning wage growth with inflation. By tackling these issues, the Philippines can create a more financially resilient population, capable of making informed decisions that promote long-term economic well-being.

What you can do

Knowledge is your first line of defense against predatory lending and poor financial decisions. Begin by enhancing your own financial literacy. Seek out resources, workshops, and seminars that can educate you on budgeting, saving, insurance, investing, and understanding the risks associated with loans.

Before taking out a loan, critically evaluate the terms, interest rates, and the necessity of the loan itself. Ask yourself whether the loan is for a productive purpose that will contribute to your financial growth, or if it’s for immediate gratification that could wait.

Start setting aside a small amount regularly to build an emergency fund. This fund acts as a buffer against unforeseen expenses, reducing the need to borrow in a pinch. Get adequate health insurance coverage to protect yourself from high cost of hospitalization and medical bills. If you have dependents, get the equivalent of 10 years of your annual income as life insurance coverage. Make sure you get term insurance. Never take investment-linked insurance.

Support initiatives aimed at incorporating financial literacy into the education system. Advocate for policies that protect consumers from predatory lending and that make financial education a priority. Engage in community savings programs or investment clubs such as cooperatives or online groups where members can learn from each other’s experiences, share financial advice, and support one another in achieving financial goals.

Ang pagyaman, napag-aaralan at napagtutulungan!