One of the most persistent challenges in consumer finance is finding the right balance between accessible credit and adequate consumer protection. These are the “bridge loans,” payday loans, and micro-credit lines used by ordinary Filipinos to cover temporary cash needs — money for utilities, medicine, school requirements, or emergency expenses.

It is precisely this segment that the Securities and Exchange Commission (SEC) seeks to address through a draft memorandum order lowering the interest rates for loans up to P20,000 and with tenors up to six months. The proposal recalibrates the existing ceilings imposed on lending and financing companies and is designed to curb abusive and usurious lending practices that have flourished in recent years, especially online.

There is no question that small loans carry higher risk. Many borrowers lack collateral, have thin credit files, or have irregular income streams. But these realities have long been exploited by lenders who charge monthly interest rates reaching double digits.

The result is a cycle all too familiar: a borrower takes out a small loan, misses one payment, and suddenly faces snowballing interest, penalty charges, and aggressive collection practices. The fees often exceed the principal, trapping borrowers in a debt spiral from which they struggle to recover.

Lowering interest-rate ceilings, especially for the most vulnerable loan size and tenor, directly addresses this cycle. It ensures that short-term credit remains available without allowing pricing that is unconscionably disproportionate to the amount borrowed.

Some lenders undoubtedly will exit, particularly those whose profits depend on charging exorbitant interest. These tend to be smaller, undercapitalized, or semi-formal players who lack the technology or systems to assess risk properly. Their exit is not a sign of market failure but a sign of market cleansing.

On the other hand, well-capitalized, compliant and tech-enabled lenders can operate sustainably even under lower caps. Digital platforms using credit scoring, automated KYC, and alternative data thrive on efficiency. They can lend at lower rates because their operating costs are lower and their risk models more precise.

Beyond economics, lowering interest rates is also about restoring trust. Many Filipinos now associate small loans with harassment — collections over messaging apps, public shaming, threats, or unregulated aggregators selling borrower information.

A clearer, lower interest ceiling provides regulators with a stronger enforcement tool. It simplifies compliance monitoring and allows the SEC to crack down more decisively on abusive actors, especially online lenders operating through mobile apps.

The SEC’s draft memorandum represents a thoughtful, data-driven attempt to address longstanding gaps in consumer lending. It ensures that access to credit remains while guarding against practices that turn financial help into financial harm.

Lower interest rates for the smallest and shortest loans are not merely a policy tweak, they are a statement that fairness matters, that financial inclusion must be responsible, and that ordinary Filipinos deserve protection from usurious and predatory lending.