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MANILA – Starting this month, banks, credit card issuers, lending investors and pawnshops are barred from charging flat interest rates on loans, the Bangko Sentral ng Pilipinas said on Monday.
In a briefing, Deputy Governor Nestor A. Espenilla Jr. said Republic Act 3765, also called the Truth in Lending Act, took effect July 1.
“Charging borrowers on flat-rate basis is illegal,” he told reporters.
The law prohibits the practice of charging interest based on the initial balance of a loan throughout the term of the loan.
Instead, credit providers are required to adjust the interest rate as the principal amount declines with each monthly payment.
Besides requiring interest payments be based on the remaining balance of a loan, the law also mandates lenders to disclose in greater detail the effective interest rate so a borrower is informed and thus can make an enlightened decision.
“We don’t like to emphasize the punitive side of the law because lenders are perceived to be responsible credit providers. But we reserve the option to impose sanctions on violators,” Espenilla said.
According to Circular No. 730, lenders charging flat interest rates will be fined P30,000 plus P100 for each day the violation is left uncorrected.
Espenilla said lenders who insist on charging flat rates could lose their license.
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