The cost doesn't disappear—it simply moves to other margins of the contract.
A PPD-backed amendment prohibiting interest on interest passed with 79 votes, marking a rare legislative victory for a decades-old consumer protection proposal. Banks argue the total ban is unprecedented globally and will reduce credit availability, eliminate grace periods, and harm deposit holders through lower savings returns.
- Amendment passed May 20 with 79 votes in favor, 57 against, 17 abstentions
- Bans all compound interest (anatocismo), not just on defaulted debt
- Similar proposals rejected eight times since 1990
- Would eliminate grace periods, affect savings account returns, and potentially raise borrowing costs
Chile's Chamber of Deputies approved a provision banning compound interest (anatocismo) in a major reform bill, alarming banks and financial institutions who warn it could reduce credit access, raise rates, and harm savers.
On May 20th, the Chamber of Deputies quietly approved a provision that has set Chile's financial sector on edge. Buried within the government's broader National Reconstruction bill was an amendment that would ban compound interest—the practice of charging interest on unpaid interest—across all credit operations. The measure passed with 79 votes in favor, 57 against, and 17 abstentions, a surprisingly decisive margin for a proposal that has circulated through Congress since 1990 without success.
The amendment came from Héctor Ulloa, deputy and subhead of the PPD-Independents bloc, who framed it as a long-overdue consumer protection. "This demand has been cross-partisan and persistent for decades," Ulloa said, noting that similar proposals have been introduced at least eight times from across the political spectrum. The specific language is stark: no interest on interest may be stipulated under any circumstance, and any capitalized interest violating this rule becomes unenforceable against the borrower. The change would apply to debts not yet in default—meaning a credit card holder who misses a payment and then accrues interest on that unpaid balance would, under the new rule, see no additional interest charged in subsequent billing cycles.
The financial industry's alarm is immediate and visceral. Luis Opazo, general manager of the Banking Association, called the total prohibition "unprecedented" and inconsistent with international practice. He warned that the ban would shrink credit availability, eliminate grace periods on loans, and undermine the returns that savers earn on time deposits and savings accounts—essentially harming both borrowers and depositors simultaneously. Claudio Ortiz, head of the Financial Retail Association, echoed the concern, describing the proposal as a "two-sided coin" that would damage both debtors and those relying on interest income. He pointed out that Congress had already considered and rejected a similar blanket ban in 2021, choosing instead to restrict compound interest only for loans already in default.
Legal experts have entered the debate with measured skepticism. José Antonio Gaspar, former general counsel of the Financial Market Commission, explained that compound interest capitalization is standard practice in credit operations and that the new rule would eliminate a mechanism that has been analyzed and refined through recent regulatory changes. Mauricio Larraín, president of the Capital Markets Advisory Council and a professor at Universidad de los Andes, was more pointed: while protecting debtors is legitimate, he argued, a blanket prohibition is a blunt instrument that doesn't eliminate the cost of credit—it merely relocates it. Lenders unable to charge compound interest will simply raise base rates, demand larger collateral, or ration credit more strictly, ultimately harming the same lower-income borrowers and small businesses the rule aims to protect. Chile already has more targeted tools, Larraín noted, including a maximum conventional interest rate cap and enforcement by consumer and financial regulators.
The political coalition that backed the amendment was revealing. All center-left parties voted in favor—the Communist Party, Broad Front, Socialist Party, PPD, Christian Democracy, and others. The right-wing Republican Party and UDI bloc rejected it entirely. But the vote was not perfectly partisan: within the National Libertarian Party, one deputy voted yes while seven voted no; in Renovación Nacional, nine abstained while only two voted against. The PDG, a smaller left-leaning party, voted almost unanimously in support. Constanza Hube of the UDI filed a constitutional objection, arguing the amendment violated the bill's foundational principles, but Ulloa countered that protecting families from debt that "multiplies itself" aligned perfectly with the reconstruction message.
Ulloa defended his position by pointing to historical precedent. Roman law restricted compound interest to protect debtors, he noted, and modern restrictions exist in France, Italy, and Colombia. "What is truly exceptional is not our amendment—it is Chile's permissiveness, where interest capitalizes every 30 days," he said. Yet the financial sector and legal experts argue that those international examples apply restrictions selectively, often only to defaulted debt, not across the entire credit system as this amendment proposes.
The measure now moves to the Senate, where the real battle will unfold. The speed of passage in the Chamber—without the extended debate that killed similar proposals in the past—has alarmed the financial industry, which fears insufficient time for expert analysis. If the Senate approves the amendment unchanged, the consequences could be substantial: higher borrowing costs disguised as higher interest rates, reduced access to credit for lower-income Chileans and small businesses, and diminished returns for savers. If it modifies or rejects the provision, it will signal that even a broad legislative coalition cannot override the structural logic of how credit markets function.
Citas Notables
The total prohibition is unprecedented and inconsistent with international practice, and will shrink credit availability and eliminate grace periods on loans.— Luis Opazo, Banking Association general manager
Prohibiting compound interest doesn't eliminate the cost of credit—it relocates it to higher base rates, larger collateral demands, and credit rationing that harms the same lower-income borrowers the rule aims to protect.— Mauricio Larraín, Capital Markets Advisory Council president
La Conversación del Hearth Otra perspectiva de la historia
Why did this amendment pass now, after failing eight times since 1990?
The political moment shifted. It came wrapped inside a larger reconstruction bill that had momentum, and the left-wing coalition had the votes. Previous attempts were debated in isolation and defeated. This time, it moved quietly and quickly.
The banks say it's unprecedented globally. Is that true?
Mostly yes. Other countries restrict compound interest on defaulted debt—debt already in trouble. Chile's amendment bans it entirely, even on current, non-defaulted obligations. That distinction matters enormously for how credit actually works.
If the goal is to protect borrowers, why would higher interest rates hurt them?
Because the cost doesn't disappear. If a bank can't charge compound interest, it simply raises the base rate to compensate. The borrower pays more upfront instead of more over time. The poorest borrowers—those with the worst credit—lose access entirely because the risk becomes unprofitable to price.
What about savers? How does this affect someone with a savings account?
Their interest compounds too. If you deposit money and earn 3 percent annually, that interest gets added to your principal and earns interest itself next year. Ban compound interest, and that mechanism breaks. Savers earn less, or banks lower deposit rates to compensate.
Could the Senate fix this by narrowing the scope?
That's what experts are hoping for. If the Senate limits the ban to defaulted debt only—as happened in 2021—it protects struggling borrowers without dismantling the entire credit system. But the amendment as written is absolute.
Why would Ulloa push something so broad if narrower versions exist?
He believes the narrower versions don't go far enough. He sees compound interest itself as inherently exploitative, not just when debt is in default. He's betting that the political will exists now to make a fundamental change.