Understanding the Correct Interest Rates for Online Lending Apps (OLAs) in the Philippines: What Every Borrower Needs to Know

written by: Miss A 💋

With the increasing number of Filipinos resorting to Online Lending Apps (OLAs) for quick financial solutions, it’s more important than ever to be well-informed about the regulations governing the interest rates charged by these platforms. Many borrowers, driven by urgent needs, often overlook the fine print, leading to a misunderstanding of the true cost of borrowing. This blog post aims to provide a comprehensive overview of the correct interest rates that should be applied by lending institutions, particularly OLAs, in the Philippines. Understanding these rates is crucial to safeguarding your financial well-being and ensuring that you are not subjected to unfair lending practices.

The Legal Framework: Batas Pambansa Blg. 68 and Lending Practices

First, let’s discuss the legal foundation that regulates lending practices in the Philippines. According to Batas Pambansa Blg. 68, also known as the Corporation Code of the Philippines, corporations, including lending companies, are permitted to charge interest on loans. However, these interest rates must adhere to regulations set forth by the Bangko Sentral ng Pilipinas (BSP) and other relevant laws.

The BSP, as the central monetary authority, plays a pivotal role in ensuring that lending institutions operate within a framework that protects consumers from predatory lending practices. One of its critical functions is to set the maximum allowable interest rates to prevent borrowers from falling into debt traps due to exorbitant interest charges.

BSP Circular No. 1133: Setting the Maximum Interest Rate

One of the key regulations that govern interest rates is BSP Circular No. 1133, issued in January 2021. This circular specifically addresses the maximum nominal interest rate that can be charged by lending companies, including OLAs. According to the circular, the nominal interest rate that can be imposed on loans that do not exceed 10,000 pesos is capped at 6% per annum. This translates to a monthly interest rate of 0.5%.

To put this into perspective, if you were to borrow 10,000 pesos with a nominal interest rate of 0.5% per month, you would be required to pay 50 pesos in interest for that month (calculated as 10,000 pesos x 0.005). This might seem like a manageable amount, but the nominal interest rate alone does not represent the total cost of borrowing. Other fees and charges must be considered to get the full picture.

Understanding the Effective Interest Rate (EIR)

While the nominal interest rate gives you a basic idea of the interest you’ll be paying, it doesn’t account for the other fees and charges that lenders often impose. This is where the Effective Interest Rate (EIR) comes into play. The EIR reflects the true cost of borrowing because it includes all additional fees and charges that you must pay, beyond just the interest on the principal loan amount.

For example, suppose you take out a loan of 10,000 pesos with a nominal interest rate of 0.5% per month. In addition to the interest, you are charged a service fee of 200 pesos per month and a one-time processing fee of 100 pesos. For the first month, your total payment would be 350 pesos (comprising 50 pesos interest + 200 pesos service fee + 100 pesos processing fee). For subsequent months, the total payment would be 300 pesos (interest + service fee).

It’s essential to understand that the EIR is often higher than the nominal interest rate because it includes all these additional costs. By calculating the EIR, you can better assess whether the loan is affordable and whether the lender is charging a fair rate. It’s a crucial metric for borrowers to consider, especially when comparing different loan offers.

Protecting Borrowers: SEC Memorandum Circular No. 18, Series of 2019

The government recognizes the potential for abuse in lending practices, which is why regulations have been put in place to protect borrowers from unreasonable fees. The SEC Memorandum Circular No. 18, Series of 2019, is one such regulation. This circular was issued by the Securities and Exchange Commission (SEC) to ensure that lending companies, including OLAs, disclose all fees and charges to clients before they sign any loan agreement.

According to the circular, OLAs must present all the terms and conditions of the loan, including the interest rate, service fees, processing fees, and any other charges, in a clear and understandable manner. This transparency is crucial in helping borrowers make informed decisions and avoiding unexpected financial burdens.

Moreover, the circular emphasizes that all fees must be reasonable and not impose undue hardship on borrowers. The goal is to prevent lenders from taking advantage of borrowers' financial distress by imposing excessive fees that can lead to deeper debt.

Your Rights as a Borrower

As a borrower, it’s essential to be aware of your rights. Knowledge is your first line of defense against predatory lending practices. Here are some key points to remember:

1. Right to Information: You have the right to know all the details regarding fees and charges before signing a loan agreement. Don’t hesitate to ask for a breakdown of all costs and ensure that you understand the total amount you will be paying over the life of the loan.

2. Right to Fair Treatment: Lenders are prohibited from using harassment, threats, or coercion to collect debts. If you experience such treatment, you can report the lender to the SEC or the Bangko Sentral ng Pilipinas. Both agencies have mechanisms in place to investigate and take action against abusive lending practices.

3. Right to Privacy: Your personal information is protected by law. Lending companies are not allowed to disclose your information to third parties without your consent, and any misuse of your information can be reported to the National Privacy Commission.

4. Right to Recourse: If you believe that a lender is charging unfair interest rates or engaging in unlawful collection practices, you can file a complaint with the SEC or the BSP. These agencies are tasked with ensuring that lending companies comply with the law and that borrowers are treated fairly.

How FILFLAG Can Help

At FILFLAG, we are committed to promoting fair and reasonable lending practices in the Philippines. We understand the challenges that borrowers face, especially when dealing with unscrupulous lenders who exploit their financial vulnerabilities. As part of our advocacy, we offer support and guidance to individuals who need help navigating the complexities of borrowing from OLAs.

If you have encountered unfair interest rates or have been subjected to abusive collection practices, we encourage you to reach out to us. FILFLAG offers a range of services, including legal assistance, financial education, and advocacy support, to help borrowers protect their rights and achieve financial stability.

Join the FILFLAG Advocacy

We invite you to become a FILFLAG Verified Advocate and join us in our mission to ensure that lending practices in the Philippines are fair, transparent, and just. By becoming a member, you gain access to valuable resources, including legal assistance, educational materials, and a community of like-minded individuals who are committed to promoting responsible lending practices.

To join, simply send a message to our official FILFLAG Facebook page, the Filipino Fair Loans Advocacy Group, or visit our website at www.filflag.org for more information. Together, we can make a difference and help build a financial system that serves the best interests of all Filipinos.

Conclusion

Understanding the correct interest rates for loans, particularly from Online Lending Apps, is crucial in protecting yourself from potential financial pitfalls. By being informed about your rights and the regulations that govern lending practices, you can make better decisions and avoid falling victim to unfair lending practices.

At FILFLAG, we are here to support you every step of the way. Whether you need advice on a loan, assistance with a complaint, or simply want to learn more about your rights as a borrower, we are here to help. Thank you for your continued support, and remember, knowledge is power. Stay informed, stay protected, and let’s work together to promote fair lending practices in the Philippines.