Are High-Interest Online Lending Apps With Daily Penalties Legal in the Philippines?

Introduction

In the digital age, online lending applications have proliferated in the Philippines, offering quick access to credit through smartphones. These platforms often advertise instant approvals and disbursements, targeting individuals in need of immediate funds. However, many such apps impose exorbitant interest rates—sometimes exceeding 1% per day—and compound penalties on a daily basis for late payments. This raises critical questions about their legality under Philippine law. While financial innovation is encouraged, predatory practices that exploit borrowers can violate regulations designed to protect consumers.

This article examines the legal framework governing online lending in the Philippines, focusing on high-interest rates and daily penalties. It draws on relevant statutes, regulatory issuances, and judicial precedents to assess whether such features render these apps unlawful. Key considerations include registration requirements, interest rate ceilings (or lack thereof), penalty clauses, and prohibitions on unfair debt collection. Understanding these elements is essential for borrowers, lenders, and regulators alike, especially amid rising complaints about harassment and debt traps.

Regulatory Framework for Online Lending

Online lending in the Philippines falls under the purview of multiple regulatory bodies, primarily the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP). The primary legislation is Republic Act No. 9474, known as the Lending Company Regulation Act of 2007 (LCRA), which mandates that all lending companies must secure a Certificate of Authority (CA) from the SEC to operate legally. This applies to both traditional and online lenders.

In response to the surge in online lending platforms, particularly those originating from foreign entities, the SEC issued Memorandum Circular No. 19, Series of 2019 (MC 19-2019), titled "Rules and Regulations Governing the Registration and Operations of Online Lending Platforms." This circular requires online lending platforms (OLPs) to register with the SEC and comply with disclosure requirements, including transparent terms on interest rates, fees, and penalties. Unregistered OLPs are deemed illegal and subject to penalties, including fines up to PHP 1 million and imprisonment.

Additionally, the BSP regulates financial institutions under Republic Act No. 7653 (The New Central Bank Act) and Republic Act No. 8791 (The General Banking Law of 2000). While OLPs are not banks, those engaging in fintech activities may need BSP approval if they involve deposit-taking or other banking functions. The Credit Information Corporation (CIC), established under Republic Act No. 9510, also plays a role by maintaining credit data to prevent over-indebtedness.

The National Privacy Commission (NPC) enforces Republic Act No. 10173 (Data Privacy Act of 2012), which is crucial for OLPs that collect personal data. Unauthorized access to contacts or social media for collection purposes can lead to violations, with penalties including imprisonment and fines.

Legality of High-Interest Rates

One of the most contentious aspects of online lending apps is their high-interest rates, often calculated daily or weekly, leading to effective annual rates (EAR) exceeding 100% or even 1,000%. Historically, the Philippines had Republic Act No. 2655 (Usury Law of 1916), which capped interest at 12% per annum for secured loans and 14% for unsecured ones. However, Central Bank Circular No. 905, Series of 1982, suspended the Usury Law's ceilings, allowing interest rates to be freely negotiated between parties, subject to market forces.

This deregulation means there is no statutory cap on interest rates. However, the freedom to contract is not absolute. Article 1306 of the Civil Code of the Philippines (Republic Act No. 386) stipulates that contracts must not be contrary to law, morals, good customs, public order, or public policy. Courts have consistently held that "unconscionable" or "iniquitous" interest rates are voidable.

Supreme Court jurisprudence provides guidance on what constitutes unconscionable interest. In cases like Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2011), the Court ruled that stipulated interest rates of 3% per month (36% per annum) were excessive. Similarly, in Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, 2009), a 3.5% monthly rate was deemed void. A general threshold from case law suggests that rates exceeding 5-6% per month (60-72% per annum) are presumptively unconscionable, especially for short-term, unsecured loans.

For online apps, rates like 1% per day (equivalent to 365% per annum) clearly fall into this category. Borrowers can challenge such rates in court, seeking nullification under Article 1409 of the Civil Code, which voids contracts with illegal causes. Moreover, MC 19-2019 requires OLPs to disclose the effective interest rate (EIR) in compliance with the Truth in Lending Act (Republic Act No. 3765), which mandates full disclosure of finance charges. Failure to disclose or misrepresenting rates can result in administrative sanctions or criminal liability.

Daily Penalties and Their Legal Implications

Daily penalties for late payments are another hallmark of many online lending apps, often accruing at rates like 1-5% per day on the overdue amount. These can quickly balloon a small loan into an insurmountable debt.

Under Philippine law, penalties are governed by Article 1229 of the Civil Code, which allows courts to reduce penalties if they are "iniquitous or unconscionable." The Supreme Court in Ligutan v. Court of Appeals (G.R. No. 138677, 2002) emphasized that penalties must be reasonable and not serve as a means to enrich the lender unduly. A penalty equivalent to the principal or exceeding it within a short period is likely void.

Furthermore, compounded daily penalties may violate the prohibition on "anomalous" or "pyramiding" interest under BSP regulations. Circular No. 799, Series of 2013, sets the effective interest rate for credit card transactions at 2% per month but does not directly apply to OLPs. However, analogy suggests that daily compounding leading to excessive charges is impermissible.

MC 19-2019 explicitly prohibits "unfair collection practices," including harassment, threats, or public shaming—common tactics used by rogue apps to enforce daily penalties. Violations can lead to revocation of the CA and referral to the Department of Justice (DOJ) for criminal prosecution under Republic Act No. 10175 (Cybercrime Prevention Act of 2012) if online harassment is involved.

Enforcement and Consumer Protection Measures

The Philippine government has taken proactive steps against predatory online lending. In 2019, the SEC imposed a moratorium on new OLP registrations to review existing ones, leading to the shutdown of hundreds of unregistered apps. By 2023, only around 100 OLPs were duly registered, with ongoing monitoring.

The Anti-Usury Board, although defunct since the 1980s, has been supplemented by inter-agency efforts. The DOJ, Philippine National Police (PNP), and National Bureau of Investigation (NBI) have conducted operations against illegal lenders, often linked to foreign syndicates. Republic Act No. 10870 (Philippine Credit Card Industry Regulation Law) and proposed bills like the Anti-Predatory Lending Act aim to reinstate interest caps, but as of 2025, no new caps have been enacted.

Consumers can seek redress through the SEC's complaints desk, the BSP's Consumer Protection Department, or small claims courts for disputes under PHP 400,000. Class action suits under Rule 3 of the Rules of Court are possible for widespread violations. The Consumer Act of the Philippines (Republic Act No. 7394) provides additional protections against deceptive practices.

Challenges and Emerging Issues

Despite regulations, challenges persist. Many apps operate via app stores without physical presence, evading enforcement. Foreign-owned platforms, often from China or Southeast Asia, use local dummies to circumvent the 60% Filipino ownership requirement under the LCRA.

The COVID-19 pandemic exacerbated reliance on online loans, leading to a spike in complaints. By 2024, the SEC reported over 10,000 complaints annually, prompting enhanced digital surveillance. Emerging issues include the use of AI for credit scoring, which must comply with data privacy laws, and cryptocurrency-linked lending, regulated under BSP Circular No. 1108, Series of 2021.

Borrowers should verify an app's legitimacy via the SEC website's list of registered OLPs. Signs of illegality include lack of disclosure, aggressive marketing, or demands for upfront fees.

Conclusion

High-interest online lending apps with daily penalties are not inherently illegal in the Philippines, but many operate unlawfully if unregistered or imposing unconscionable terms. While interest rates can be negotiated freely, courts will strike down excessive ones as void. Daily penalties must be reasonable to avoid nullification. Compliance with SEC regulations, transparent disclosures, and fair practices are mandatory.

Ultimately, the legality hinges on adherence to the LCRA, Civil Code, and related issuances. Borrowers are advised to borrow responsibly from registered entities, while regulators continue to adapt to technological advancements. Strengthening enforcement and potentially reintroducing rate caps could further safeguard vulnerable Filipinos from debt traps.