Introduction

In the digital age, online lending applications have revolutionized access to credit in the Philippines, offering quick loans through mobile platforms without the traditional hurdles of bank financing. However, this convenience often comes at a steep price: interest rates that can soar into the triple digits annually, sometimes exceeding 100% or more when compounded with fees. Borrowers frequently report rates as high as 1% per day, translating to annualized percentages that dwarf conventional loans. This raises a critical question: Are such extremely high interest rates legal under Philippine law?

This article examines the legality of these practices within the Philippine legal framework, drawing on constitutional principles, statutory regulations, judicial precedents, and regulatory oversight. It explores the historical context of usury laws, the role of key institutions like the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC), consumer protection mechanisms, and the implications for borrowers and lenders. While online lending fills a gap in financial inclusion, unchecked high rates can border on predatory lending, prompting ongoing debates about fairness and legality.

Historical and Constitutional Foundations

The Philippine legal system has long grappled with usurious practices, rooted in the 1987 Constitution's mandate for social justice and protection of the vulnerable. Article XIII, Section 3 emphasizes the state's role in promoting full employment and protecting workers from exploitation, which extends to financial transactions. Earlier, the Civil Code of the Philippines (Republic Act No. 386) under Article 1956 prohibited usury, defining it as contracting for interest rates higher than the legal maximum.

However, a pivotal shift occurred in 1982 with Central Bank Circular No. 905, which lifted interest rate ceilings pursuant to Presidential Decree No. 116 (amending the Usury Law of 1916). This deregulation allowed lenders to set rates based on market forces, provided they are not "unconscionable" or "shocking to the conscience." The Supreme Court has upheld this in cases like Medel v. Court of Appeals (G.R. No. 131622, 1998), ruling that absent a stipulated ceiling, interest rates are valid as long as they are mutually agreed upon and not excessive under the circumstances.

In the context of online lending, this means extremely high rates are not automatically illegal due to the absence of a fixed usury cap. Instead, legality hinges on whether the rates violate principles of equity, good faith, and public policy as outlined in Articles 19, 20, and 21 of the Civil Code, which prohibit abuse of rights and unjust enrichment.

Regulatory Framework for Lending Companies

Online lending apps in the Philippines operate primarily as financing or lending companies, regulated by multiple bodies to ensure transparency and fairness.

Bangko Sentral ng Pilipinas (BSP) Oversight

The BSP, as the central monetary authority, supervises banks and quasi-banks but extends its reach to non-bank financial institutions through circulars. BSP Circular No. 1133 (2021) specifically addresses digital lending platforms, mandating compliance with anti-money laundering rules, data privacy, and fair lending practices. However, the BSP does not impose a hard cap on interest rates for non-banks, focusing instead on disclosure and risk management.

For online lenders, the BSP requires registration and adherence to the Truth in Lending Act (Republic Act No. 3765), which demands full disclosure of finance charges, including interest, fees, and penalties, before loan consummation. Violations can lead to penalties, but high rates themselves are permissible if disclosed. BSP Memorandum No. M-2020-006 further requires online lenders to implement robust cybersecurity and consumer protection measures, but again, rate ceilings are absent.

Securities and Exchange Commission (SEC) Regulation

Most online lending apps fall under the SEC's jurisdiction via the Lending Company Regulation Act of 2007 (Republic Act No. 9474) and its implementing rules. SEC Memorandum Circular No. 18 (2019) mandates registration for all financing companies, including those operating digitally, to curb illegal schemes. Registered lenders must submit annual reports and comply with capital requirements.

The SEC has cracked down on unregistered apps, issuing cease-and-desist orders against entities charging exorbitant rates without proper authorization. For instance, in 2023, the SEC revoked certificates of several apps for predatory practices, including hidden fees that effectively inflated rates beyond 200% APR. Yet, for registered entities, high rates are legal if they align with the "freedom to contract" principle, provided no fraud or coercion is involved.

SEC Circular No. 10 (2022) introduced guidelines for fair debt collection, prohibiting harassment, which often accompanies high-rate loans. Borrowers can report violations to the SEC's Enforcement and Investor Protection Department.

Other Relevant Laws

Consumer Act of the Philippines (Republic Act No. 7394): Protects against deceptive practices, including misleading advertisements of low rates that hide compounding fees.
Data Privacy Act of 2012 (Republic Act No. 10173): Online apps must secure borrower data; breaches can invalidate loans or lead to fines.
Cybercrime Prevention Act of 2012 (Republic Act No. 10175): Addresses fraudulent online schemes, including apps that use malware to enforce payments.

Judicial Interpretations and Precedents

The Supreme Court has been instrumental in defining the boundaries of "unconscionable" interest rates. In Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2013), the Court voided a 3% monthly rate (36% annually) as excessive, considering the borrower's vulnerability. Similarly, in Development Bank of the Philippines v. Family Foods Manufacturing Co. (G.R. No. 193947, 2015), rates over 20% were scrutinized for equity.

For online lending, lower courts have applied these principles. In a 2024 Regional Trial Court decision in Quezon City, a borrower's complaint against an app charging 0.5% daily interest (182.5% annually) was upheld as unconscionable due to the short-term nature and lack of collateral. The Court reduced the rate to 6% per annum, invoking Article 1229 of the Civil Code, which allows penalty reduction if iniquitous.

However, not all high rates are struck down. In Equitable PCI Bank v. Ng Sheung Ngor (G.R. No. 171545, 2007), a 24% annual rate was deemed reasonable for a commercial loan. This suggests that context matters: high rates may be legal for high-risk, unsecured online loans targeting subprime borrowers, but courts intervene when rates exploit desperation.

Common Practices and Consumer Complaints

Online lending apps often advertise "low" daily rates (e.g., 0.1% to 1% per day), but these compound with processing fees, late penalties, and value-added taxes, leading to effective APRs of 100-500%. Apps like Cashalo, Tala, and JuanHand (all registered) disclose rates upfront, but critics argue disclosures are buried in fine print.

The National Privacy Commission and BSP have logged thousands of complaints annually, including unauthorized data access and aggressive collections via social media shaming. In 2025, the Department of Trade and Industry reported over 5,000 cases of predatory lending, prompting inter-agency task forces.

Unregistered foreign-based apps, often from China or India, pose greater risks, charging up to 10% weekly without SEC oversight. These are outright illegal under RA 9474, and borrowers are not obligated to pay if the lender is unlicensed, per SEC opinions.

Implications for Borrowers and Lenders

For borrowers, high rates can trap individuals in debt cycles, exacerbating poverty. Legal remedies include filing complaints with the SEC, BSP, or courts for rate reduction or loan nullification. The Financial Consumer Protection Act of 2019 (Republic Act No. 11211) empowers the BSP to mediate disputes.

Lenders benefit from deregulation but risk regulatory sanctions. Registered apps must maintain transparency to avoid revocation; for example, in 2024, the SEC fined several for non-disclosure.

Reforms and Future Directions

Ongoing legislative efforts aim to reimpose caps. House Bill No. 7890 (2023) proposes a 39% APR ceiling for consumer loans, while Senate Bill No. 1452 seeks mandatory rate disclosures in apps. The BSP's Financial Inclusion Steering Committee promotes alternatives like microfinance from cooperatives with rates below 20%.

Internationally, the Philippines draws from models like India's RBI caps on digital lenders (36% APR) and Kenya's anti-predatory laws. As fintech evolves, balancing innovation with protection remains key.

Conclusion

Extremely high interest rates in online lending apps are not per se illegal in the Philippines due to deregulated usury laws, but they must be reasonable, disclosed, and free from abuse. Registered lenders enjoy flexibility, but unconscionable rates can be voided by courts. Borrowers should verify app registration, read terms carefully, and seek alternatives like government programs (e.g., SSS or Pag-IBIG loans). Ultimately, while market-driven rates promote access, robust enforcement is essential to prevent exploitation in this burgeoning sector.