Are Debt Collectors Allowed to Impose Excessive Interest and Fees in the Philippines?

Short answer: No. Debt collectors (and the lenders they represent) cannot unilaterally add interest or fees that aren’t clearly allowed by your contract and by law. Even if a rate or fee is written in the contract, Philippine courts and regulators can strike it down or reduce it if it’s unconscionable, unreasonable, not properly disclosed, or otherwise illegal.

Below is a practical, everything-you-should-know guide—written for consumers, counsel, and compliance folks alike.

The Legal Foundations (What the Law Actually Says)

Civil Code

No interest without written agreement. “No interest shall be due unless it has been expressly stipulated in writing.” (Art. 1956). E-signatures are valid under the E-Commerce Act (RA 8792).
Compounding limits. Interest cannot earn interest (no “interest-on-interest”) unless it’s expressly agreed or the interest has been judicially demanded, in which case the legal interest applies to the unpaid interest (Arts. 1959 and 2212).
Penalty/late charges can be cut down. Courts may reduce penalty clauses or liquidated damages if iniquitous or unconscionable (Arts. 1229, 2227).
Payments go to interest first. If a debt bears interest, any payment is applied to interest before principal (Art. 1253).
Abuse has consequences. Acts contrary to law, morals, good customs, or public policy can create liability (Arts. 19–21).

Usury & Interest Ceilings

Statutory usury ceilings were suspended in the 1980s (Monetary Board action, commonly known as MB Circ. 905). This does not mean “anything goes.” Courts routinely void or reduce exorbitant rates as unconscionable (see case law below).

Default/“Legal” Interest Rate

When the agreed rate is invalid, missing, or after judicial demand, the courts apply the legal interest. Since July 1, 2013, the legal rate has been 6% per annum (BSP Circ. 799; Nacar v. Gallery Frames, G.R. No. 189871, 13 Aug 2013). (Before that date, it was 12% under earlier rules.)

Disclosure & Fairness Rules

Truth in Lending Act (RA 3765): Lenders must clearly disclose the finance charge and all fees. Hidden or misleading charges are unlawful.
Lending Company Regulation Act (RA 9474) and IRR (SEC): licensing, conduct standards, and disclosures for lending/financing companies.
Financial Consumer Protection Act (RA 11765, 2022): Prohibits unreasonable terms and charges and empowers BSP, SEC, and IC to investigate, sanction, and order restitution for abusive practices.
Credit cards (RA 10870, 2016): Gives the BSP explicit power to regulate issuers, including ceiling(s) on finance charges/fees and robust disclosure requirements. (BSP periodically sets/adjusts caps by circular; collectors and issuers must follow the current caps.)

Debt Collection Conduct (Non-price rules you should still know)

SEC Memorandum Circular No. 18 (2019) (for lending/financing companies): prohibits unfair debt collection practices (e.g., threats, harassment, shaming, contacting third parties without authority, misrepresenting amounts owed). It also bars collecting amounts not authorized by the contract/law.
Data Privacy Act (RA 10173): Using your contacts or disclosing your debt to others without a lawful basis can trigger privacy violations and penalties.

What Counts as “Excessive” Interest or Fees?

Because the usury ceilings are suspended, the question becomes whether the charges are unconscionable or unreasonable under the Civil Code and consumer laws. The Supreme Court has repeatedly struck down or reduced steep rates and charges—even if the borrower signed—when they shock the conscience or function as a penalty:

Medel v. Court of Appeals, G.R. No. 131622 (27 Nov 1998) – monthly rates equating to sky-high annual charges deemed unconscionable and reduced.
Neri v. Heirs of Hadjia, G.R. No. 138031 (15 Jan 2001) – 3% per month (36% p.a.) treated as excessive and cut down.
Ligutan v. Court of Appeals, G.R. No. 138677 (16 Jan 2002) – penalty interest and attorney’s fees pared back as iniquitous.
Numerous later cases followed the same reasoning, sometimes reducing rates to the legal 6% when the stipulated rate is void.

Key takeaways from the jurisprudence

Courts look at the totality: nominal interest plus penalties, default interest, “collection fees,” and compounding. A package that produces an oppressive effective rate will likely be reformed.
Penalty interest is not a blank check. It is a penal clause subject to equitable reduction (Arts. 1229, 2227).
Attorney’s/collection fees: enforceable only if stipulated and must be reasonable; courts frequently slash them (10% of the amount due is a common ceiling in practice, but it’s not a statutory cap—reasonableness controls).

What Debt Collectors May—and May Not—Charge

They may charge:

Contractual interest if there is a clear written stipulation and it complies with applicable caps (e.g., BSP credit-card caps) and disclosure rules.
Reasonable and contractually agreed:
- Late/penalty charges (subject to reduction if unconscionable).
- Attorney’s/collection fees (if stipulated; must be reasonable).
- Other fees (processing, reminder, etc.) only if clearly disclosed before consummation and not forbidden by the regulator.

They may not:

Invent new interest/fees not found in the contract or allowed by law/circular.
Exceed regulator-imposed caps (e.g., BSP caps for credit cards).
Compound interest without express stipulation (and even then courts police for unconscionability; interest due earns legal interest upon judicial demand).
Apply payments to principal ahead of interest when the debt bears interest (Art. 1253).
Misrepresent the amount owed or bundle unlawful charges to coerce payment (this also violates SEC MC 18 and RA 11765).
Pass their agency fee to the borrower absent a clear contractual basis. (The creditor’s contract with the collector doesn’t bind the debtor.)

Practical Computations (How the Numbers Should Work)

No agreed interest; borrower in delay (damages via legal interest). Principal ₱50,000. Creditor makes written demand on Jan 1; case not yet filed. By Sept 1 (8 months), legal interest of 6% p.a. as damages: 6% × 8/12 = 4% of ₱50,000 = ₱2,000 interest.
High contractual interest vs compounding. Principal ₱100,000 at 5% per month for 12 months.

Simple: 5% × 12 = 60% ⇒ ₱60,000 interest.
Monthly compounding (only if expressly agreed): 100,000 × (1.05¹² − 1). 1.05¹² ≈ 1.795856 ⇒ interest ≈ ₱79,585.60. Courts often treat packages like this as excessive, especially with additional penalties/fees.

Payment allocation (Art. 1253). If accrued interest is ₱3,000 and you pay ₱10,000, the first ₱3,000 extinguishes interest; ₱7,000 reduces principal.

Sector-Specific Notes

Credit cards. The BSP sets maximum finance charges and certain fees by circular (under RA 10870). Issuers/collectors must comply and give proper notice of changes. If a collector is demanding charges above the cap or not disclosed in your card terms, that is a red flag. (Caps are adjusted from time to time—check the latest circular that applies to your statement period.)
Lending/Financing apps & companies (SEC-supervised). SEC MC 18-2019 outlaws unfair collection and charging unauthorized amounts. RA 11765 lets the SEC impose sanctions and order restitution for unreasonable charges.
Assignment to a collector/debt buyer. Assignment does not create new obligations. The assignee steps into the creditor’s shoes subject to the same terms and defenses. You are not liable for the collector’s private “agency fee” unless your original contract makes you liable.

Red Flags That Point to Unlawful/Unconscionable Charges

“Collection fee” (e.g., 25% of outstanding) with no clear contractual basis, or obviously disproportionate.
Stacked charges: high monthly interest plus high penalty interest plus hefty late fees plus compounding.
Back-dated new fees or one-sided “policy changes” without a contract clause and required notice/regulatory compliance.
Refusal to provide the contract, amortization schedule, and fee breakdown—contrary to RA 3765 transparency requirements.
Demands that override BSP/SEC caps or contradict your written terms.

What To Do If You’re Being Charged Excessive Interest/Fees

Get the papers. Ask for your contract, full statement of account, amortization/transaction history, and an itemized breakdown of interest, penalties, and fees (invoking RA 3765).
Audit the math. Check:
- Is there a written interest clause? What’s the nominal rate (per annum/month) and is it compounded?
- Are penalty rates separate from regular interest (potentially double-counting)?
- Are fees disclosed in the contract? Do any exceed regulatory caps?
Write a dispute letter (keep it calm and specific). Sample language you can adapt:

I dispute the following charges as unauthorized/unreasonable: [list items]. Under Art. 1956, interest must be expressly stipulated in writing; Arts. 1229/2227 allow courts to reduce unconscionable penalties; and RA 3765/RA 11765/SEC MC 18 require clear disclosure and reasonable charges. Please provide (a) the signed contract, (b) detailed computations, and (c) the specific law/circular authorizing each fee or rate. Pending validation, I tender ₱[amount] consistent with lawful charges.
Escalate to the right regulator (free).
- Banks/credit card issuers/pawnshops/money service businesses → BSP.
- Lending & financing companies (including most lending apps) → SEC.
- Insurance-related credit (premiums/loans) → Insurance Commission.
- Privacy abuses (contact scraping, debt shaming) → National Privacy Commission.
Consider court if needed.
- You can sue to void/reduce unconscionable interest/fees, recover overpayments, and seek damages.
- Small Claims (no lawyers allowed) can be a quick route for qualifying amounts.
- Courts often reset the rate to the legal 6% p.a. when the contractual rate is void.
Keep paying what’s indisputably due. Courts look favorably on borrowers who do not abandon payment; tendering the lawful amount weakens a collector’s claim for penalties.

FAQs

Can a collector raise the interest rate after default? Only if the contract allows it and the change complies with law (e.g., regulator caps, notice). Even then, courts can reduce an oppressive default rate.

Can they charge both interest and penalty interest? Yes, but penalty is a penal clause—courts can pare it back if excessive or if the creditor substantially benefits already from regular interest.

Can they charge “collection fees” on top of attorney’s fees? Not without clear stipulation—and the total must still be reasonable. Courts frequently slash such add-ons.

If the interest clause is void, do I pay zero interest? Courts typically apply legal interest (6% p.a.) as damages from the proper reckoning date (e.g., judicial or sometimes extrajudicial demand, depending on circumstances).

Is compounding automatically allowed? No. It requires express agreement. Even then, courts can stop it if it produces an unconscionable result.

Compliance Checklist (for lenders/collectors)

Written, clear interest clause (rate basis, compounding method, timing).
All fees enumerated and disclosed before consummation (RA 3765).
Caps observed (BSP/SEC/IC rules).
Penalty provisions reasonable (expect potential judicial reduction).
Collection/attorney’s fees: stipulated, reasonable, supported by proof.
Statements that itemize interest vs. penalties vs. fees.
No unfair collection conduct (SEC MC 18; RA 11765; DPA).

Bottom Line

Collectors cannot legally impose “excessive” interest and fees. Even with a signature, Philippine law lets courts and regulators strike down or trim oppressive charges.
What’s allowed must be: (1) in writing, (2) properly disclosed, (3) within regulatory caps, and (4) reasonable in total effect.
When in doubt, dispute in writing, keep paying what’s indisputably due, and escalate to the proper regulator or court.

This guide is general information, not legal advice. If a large amount or complex contract is involved, consider consulting a Philippine lawyer to review your documents and computations.