Are Consumer Cash Loan Interest Rates Legal in the Philippines?

BSP Guidance and Usury Rules

Executive Summary

In the Philippines, there is no general, across-the-board statutory cap on interest rates for consumer cash loans. The Usury Law (Act No. 2655) remains on the books, but the interest ceilings were effectively lifted by Central Bank (now BSP) Circular No. 905, effective January 1, 1983. Interest rates are largely governed by freedom of contract—subject to (1) judicial control against “unconscionable” rates, (2) mandatory disclosure and transparency rules, and (3) sector-specific regulations issued by the Bangko Sentral ng Pilipinas (BSP), the Securities and Exchange Commission (SEC), and the Insurance Commission (IC) under the Financial Consumer Protection Act of 2022 (R.A. 11765).

Below is a practitioner-grade overview of the legal framework, regulator guidance, jurisprudence, and practical compliance pointers.

1) The Legal Bedrock

1.1 Usury Law vs. Circular No. 905

Act No. 2655 (Usury Law) originally imposed interest ceilings.
Central Bank Circular No. 905 (1982) suspended (not repealed) those ceilings effective Jan. 1, 1983, leaving no fixed caps for most loans.
Result: Parties may stipulate any rate, provided it is not illegal for other reasons (e.g., fraud, coercion) and subject to judicial review for unconscionability.

1.2 Civil Code Limits (Freedom of Contract with Guardrails)

Article 1306 allows parties to establish stipulations not contrary to law, morals, good customs, public order, or public policy.
Courts may reduce or strike down interest that is “iniquitous or unconscionable.” The Supreme Court has, in numerous cases, voided or reduced very high rates (often monthly rates compounding steeply), substituting the legal interest.

1.3 Legal Interest for Substitution/Default

When stipulated interest is void/unconscionable or none is stipulated, courts apply “legal interest.”
Following Nacar v. Gallery Frames (2013) and BSP policy, the current legal interest applied by courts on forbearance of money and money judgments is 6% per annum, simple interest, unless otherwise specifically governed by regulation.

2) Who Regulates What?

2.1 BSP-Supervised Financial Institutions (BSFIs)

Banks, quasi-banks, pawnshops, electronic money issuers, credit card issuers, certain non-bank financial institutions.
BSP issues prudential and market-conduct rules: transparency, advertising and sales practices, disclosure of the effective interest rate (EIR), fees and charges, complaint handling, and debt collection standards.
For some products (e.g., credit cards), the Monetary Board has imposed specific caps/limits at various times. These product-specific caps (when in force) do not automatically extend to all consumer cash loans.

2.2 SEC-Regulated Lenders

Lending Companies (R.A. 9474) and Financing Companies (R.A. 8556) are licensed and overseen by the SEC.
SEC enforces disclosure rules, prohibitions on abusive collection, advertising standards, and sanctions against unregistered lenders or unfair practices, including many online lending platforms (OLPs).
From time to time, the SEC issues memorandum circulars addressing caps or limits for specific small-value/short-tenor loans or total cost of borrowing—but these are targeted measures, not a universal cap for all loans.

2.3 Financial Consumer Protection Act (R.A. 11765, 2022)

Grants BSP, SEC, IC stronger rule-making, market-conduct, and enforcement powers.
Requires fair treatment, disclosure, protection of consumer assets/data, and redress mechanisms.
Enables administrative enforcement (e.g., directives, fines, restitution) for unfair, deceptive, abusive acts or practices (UDAAP).

3) So, Are High Interest Rates “Legal”?

3.1 General Rule

Yes, in principle—because no general statutory cap applies after Circular 905.
But: Rates must survive judicial scrutiny and comply with regulator conduct rules.

3.2 When Courts Intervene

Philippine jurisprudence repeatedly emphasizes that “unconscionable” or “iniquitous” rates are void or reducible. Indicators include:

Excessive monthly rates (e.g., multi-percent per month) especially when compounded, yielding explosive APRs;
Gross disparity in bargaining power or take-it-or-leave-it contracts lacking transparency;
Hidden charges that inflate the effective cost of credit;
Penalty layering (high interest + steep penalty interest + hefty collection fees) resulting in oppressive total cost.

Remedies typically include:

Substitution of the unconscionable rate with the legal interest (6% p.a.) from the time of judicial or extrajudicial demand, or as otherwise directed by the court;
Voidance of penalty stipulations that are punitive;
Recomputation and restitution.

4) Transparency & Disclosure: What Must Be Shown to Borrowers

4.1 Truth in Lending Act (R.A. 3765) and BSP/SEC Rules

Lenders must clearly disclose, before consummation:

Nominal interest rate and the Effective Interest Rate (EIR);
All finance charges (processing fees, service fees, documentary stamps, insurance premiums if any, disbursement fees);
Payment schedule, amortization method, and total amount payable;
Default charges (penalty interest, late fees), prepayment or early-settlement terms and fees.

Failure to properly disclose can support regulatory penalties, civil liability, and judicial reduction of charges.

4.2 Advertising & Sales Practices

Marketing materials must be truthful and not misleading.
Headline rates cannot bury material charges in fine print; the EIR/total cost must be prominent where required by regulation.

5) Fees, Penalties, and “Total Cost of Borrowing”

Regulators focus not only on the stated interest rate but on the aggregate cost: interest + fees + penalties.
Stacking multiple fees or imposing punitive penalties can cause the effective cost to be unfair or unconscionable, inviting regulatory action or judicial reduction even if the nominal rate looks “legal.”

6) Special Product Notes

6.1 Credit Cards (BSP-Supervised)

The Monetary Board has, at times, imposed caps on credit card finance charges and installment add-ons.
These caps are product-specific and time-bound; they do not automatically govern non-card consumer cash loans unless a regulation says so.

6.2 Pawnshops and Microfinance

Pawnshops (BSP-supervised) and microfinance products have specific disclosure and conduct standards.
Even where no fixed cap exists, BSP expects fair pricing, proper risk-based underwriting, and transparent disclosure.

6.3 Online Lending Platforms (OLPs)

Many OLPs fall under SEC licensing. SEC has black-listed unregistered apps and sanctioned entities for abusive collection and privacy violations.
Borrowers should verify that the lender/OLP is properly registered and its product disclosures are compliant.

7) Collections: What Lenders May (and May Not) Do

Harassment, threats, shaming, contacting a borrower’s contacts/employer without consent, or disclosing debt information to third parties may constitute unfair collection and privacy violations.
Regulators (BSP/SEC) have issued guidelines and have sanctioned entities for unfair debt collection practices.
Borrowers can lodge complaints with the BSP Consumer Assistance Mechanism (for BSFIs) or SEC (for lending/financing companies), and invoke Data Privacy Act protections where applicable.

8) Compliance Checklist (for Lenders)

Licensing: Ensure you are properly licensed (BSP-supervised vs. SEC-licensed) for the products you offer.
Clear Contracting: Use plain-language loan agreements; avoid surprise terms.
Full Disclosure: Provide EIR, all fees, penalties, and total amount payable before contract consummation.
Fair Pricing: Set rates via risk-based pricing, track APR/EIR, and test outcomes against market norms to avoid unconscionability.
Reasonable Penalties: Avoid stacking or punitive penalty interest; cap total penalty exposure reasonably.
Collections Governance: Adopt written policies prohibiting harassment, do call-time limits, no shaming, and privacy compliance; train staff and vendors.
Complaints & Redress: Maintain accessible complaints channels, timely responses, and proper record-keeping.
Data Privacy: Collect only necessary data; obtain informed consent; secure data; allow access/correction.
Monitoring & Audit: Periodically audit EIR calculations, marketing materials, and debt collection scripts/vendors.
Board Oversight: Provide regular reports on pricing, complaints, regulatory changes, and litigation.

9) Borrower Playbook (for Consumers)

Check the license: Is the lender a bank/BSFI (BSP-supervised) or a lending/financing company (SEC-licensed)?
Ask for the EIR: Don’t rely on the headline rate. Look at total cost and amortization.
Watch fees & penalties: Processing, disbursement, late fees, penalty interest—do the math.
Beware of compounding: Monthly rates that compound quickly balloon the real cost.
Keep records: Save screenshots/agreements; they’re evidence for disputes.
Know your rights: You can file complaints with BSP or SEC and invoke Data Privacy protections against abusive collections.

10) Frequently Asked Questions

Q1: Is there a fixed legal maximum interest rate for consumer cash loans? A: No general cap. The Usury Law’s ceilings are suspended by Circular 905. However, courts may strike down or reduce rates deemed unconscionable, and regulators may impose product-specific caps (e.g., at times for credit cards) or targeted measures for certain small-value/short-tenor loans.

Q2: If my loan rate seems extremely high, is it automatically illegal? A: Not automatically. But if the rate (considering fees and penalties) is oppressive, you can seek judicial relief; courts have reduced such rates to legal interest (6% p.a.) in many cases.

Q3: Can lenders charge penalty interest and late fees on top of the regular rate? A: Yes, if clearly disclosed and reasonable. Courts frown on punitive stacking.

Q4: What happens if the lender failed to disclose the EIR or key fees? A: That can support regulatory penalties, civil liability, and judicial reduction or voiding of charges.

Q5: Are online lending apps legal? A: Many are, if SEC-licensed and compliant. Unregistered apps or those using abusive collection can be sanctioned; borrowers may seek regulatory redress.

11) Key Takeaways

No universal cap after Circular 905; rates are contractual but policed by courts (for unconscionability) and regulators (for disclosure and unfair practices).
Legal interest is 6% p.a. for substitution/default per Nacar.
Transparency and fairness are paramount: the effective price (interest plus fees/penalties) is what matters.
BSP/SEC can and do issue product- or segment-specific measures; always check the current circulars and memorandum circulars for your product type.

Practical Note

Because caps and conduct standards can be product-specific and time-varying, lenders and borrowers alike should review the latest BSP and SEC issuances that apply to their particular product (e.g., credit cards, payday-style microloans, pawn transactions). When in doubt, seek tailored legal advice—especially if dealing with high monthly rates, layered penalties, or online platforms.