Overview

Yes—interest rates above 6% per annum can be enforceable in Philippine loan contracts, because (as a general rule) Philippine law allows parties to freely stipulate interest rates. But enforceability is not automatic: higher rates are commonly upheld only if the interest is expressly agreed upon in writing and is not unconscionable, iniquitous, or shocking to the conscience. Courts retain the power to reduce excessive interest, penalties, and other charges.

This article explains how 6% functions in Philippine law, when rates higher than 6% are valid, and when courts will strike down or reduce them.

This is general legal information, not legal advice. Specific outcomes depend on the contract language, disclosures, borrower profile, and the facts of default and enforcement.

1) Why “6% per annum” matters in Philippine loan law

People often assume 6% is a “cap.” It usually is not a cap. In many situations, 6% is the default (legal) interest rate used when:

the parties did not validly stipulate an interest rate (or the stipulation fails), or
the court must impose interest as damages for delay/forbearance under jurisprudential rules.

The key point: 6% is commonly a fallback rate, not a universal ceiling.

2) The governing legal framework

A. Freedom to stipulate (but not absolute)

The Civil Code recognizes contractual freedom (e.g., parties may stipulate terms and conditions), subject to law, morals, good customs, public order, and public policy. This is the doctrinal basis for allowing market-based interest—and for limiting abusive terms.

B. Interest must be expressly agreed in writing (Civil Code rule)

A central Civil Code rule for loans/forbearance: No interest is due unless it has been expressly stipulated in writing. So:

If the lender claims interest but the written contract is silent (or interest is only verbal), courts generally treat the loan as non-interest-bearing, and only principal is collectible (though the lender may still claim legal interest as damages if there is delay, depending on circumstances).

C. The Usury Law and the lifting of interest ceilings

Historically, the Philippines had statutory interest ceilings under the Usury Law. Over time, monetary authorities issued circulars that effectively lifted/suspended those ceilings, allowing interest to be market-determined. In modern practice:

There is generally no fixed statutory ceiling for most private loans.
However, courts still police unconscionable rates and can reduce them.

3) When an interest rate above 6% per annum is enforceable

An interest rate above 6% is usually enforceable when all of the following are true:

(1) The interest is in a written agreement

The interest rate (and how it’s computed) should be clear and written—e.g., promissory note, loan agreement, disclosure statement. If ambiguous, courts often construe ambiguity against the drafter/lender.

(2) The borrower gave informed consent; disclosures were proper

For many loan types—especially consumer credit—disclosure rules matter (e.g., Truth in Lending principles). Failure to properly disclose pricing terms can weaken enforcement of charges and can expose the lender to liability.

(3) The rate is not unconscionable/iniquitous

Even with a signed document, Philippine courts can reduce interest that is excessive relative to the transaction, risk profile, bargaining power, and market context. Courts do this under equitable principles and related Civil Code provisions (including rules allowing reduction of penalties/liquidated damages).

Practical reality: Banks and regulated lenders often charge above 6% and routinely enforce those rates—unless the overall pricing structure becomes oppressive (especially once penalties, default interest, and compounding pile on).

4) When courts reduce or invalidate interest above 6%

Courts commonly intervene where the pricing is oppressive. Red flags include:

A. Extremely high monthly rates (especially if they compound)

Rates stated as “per month” can become massive annually (e.g., 5% per month = 60% per annum simple, higher if compounding). Philippine cases have frequently treated very high monthly rates as unconscionable, especially in non-bank, non-commercial contexts.

B. Stacked charges: interest + default interest + penalties + surcharges

A contract may impose:

regular interest,
default interest (higher rate upon default),
penalty charges (liquidated damages),
service fees, collection fees,
attorney’s fees.

Even if each item is “agreed,” courts look at the total economic burden. When the total becomes punitive rather than compensatory, courts often reduce one or more components.

C. Adhesion contracts or unequal bargaining power

Consumer-style forms, “take-it-or-leave-it” terms, or loans to distressed borrowers can invite closer scrutiny—particularly if the lender did not clearly explain costs.

D. Disguised interest (fees that function as interest)

Courts may treat certain “fees” as part of the effective interest if they are essentially charges for the use of money.

E. “Interest on interest” (anatocism) without proper basis

The Civil Code regulates when unpaid interest itself can earn interest. Typically, interest-on-interest is allowed only under specific conditions (e.g., written stipulation and/or judicial demand, often with timing requirements). If lenders compound improperly, courts may disallow the compounding.

5) The difference between “legal interest” and “contractual interest”

A. Contractual interest

This is the rate the parties agree on. If validly stipulated in writing and not unconscionable, courts generally enforce it:

typically until maturity of the loan (the due date), and
sometimes after maturity if the contract provides for default interest.

B. Legal interest (often 6% in modern jurisprudence)

When the contract has no valid interest stipulation, or when the court is awarding interest as damages (e.g., for forbearance or delayed payment), the court applies the legal interest rate used by prevailing Supreme Court rules.

A major jurisprudential turning point is Nacar v. Gallery Frames (2013), which harmonized court-imposed interest with the BSP’s legal rate adjustments and is the reason many judgments now use 6% per annum in many post-2013 scenarios.

Key idea: The 6% legal rate often appears in decisions because it is the default judicial rate, not because private parties are always limited to 6%.

6) Default interest vs penalty charges: how courts treat them

A borrower’s “default” can trigger:

default interest (a higher interest rate from default onward), and/or
penalty (liquidated damages).

Philippine courts can reduce penalties and sometimes default interest if they are iniquitous or unconscionable. The Civil Code expressly allows courts to equitably reduce penalties when they are excessive.

Common outcome in litigation: Courts may:

keep the principal,
enforce some interest (sometimes reduced),
reduce penalty charges significantly,
award legal interest on the adjudged amount,
trim attorney’s fees.

7) Typical litigation outcomes (what courts often do)

When a challenged rate is found excessive, courts often “reset” the financial consequences to something like:

a lower contractual interest (or legal interest),
removal/reduction of compounding,
reduction or deletion of penalties,
application of legal interest from specific dates (demand, filing, or judgment), depending on the type of obligation and damages awarded.

There is no single universal replacement rate in every case; it depends on the facts, the nature of the transaction (commercial vs personal), and the court’s assessment.

8) Special contexts worth knowing

A. Bank loans and BSP-regulated lenders

Banks and many regulated entities price loans above 6% routinely. Courts tend to respect pricing when:

disclosures are proper,
the borrower is commercially sophisticated,
the loan is a negotiated commercial transaction,
the resulting burden is not oppressive.

B. Consumer loans, credit cards, and disclosures

Disclosure rules (Truth in Lending principles) are especially important in consumer credit. If disclosures are defective, lenders may face consequences separate from whether the borrower owes principal.

C. Informal loans (friends, family, “5-6,” private lenders)

These are the most litigated for unconscionability because:

documentation is often weak,
interest is often stated monthly,
penalties/compounding are common,
borrowers may be vulnerable.

9) Practical checklist: making (or challenging) an above-6% interest clause

If you want the clause to be enforceable

Put the interest rate in writing (promissory note/loan agreement).
State whether it’s per annum or per month.
Define the basis: simple vs compounded, and compounding period.
Spell out default interest and penalties clearly; avoid stacking excessive charges.
Ensure consumer disclosures are complete (effective interest rate, finance charges).
Keep rates defensible in context (risk, term, collateral, market comparables).

If you want to challenge the clause

Check if interest was not written or was ambiguously written.
Compute the real annualized burden (including fees, default interest, penalties).
Look for unlawful compounding or interest-on-interest issues.
Raise unconscionability and ask the court to reduce interest/penalties.
Scrutinize disclosure compliance (especially for consumer loans).

10) Bottom line

Interest above 6% per annum is generally enforceable in Philippine loan contracts if:

it is expressly stipulated in writing, and
it is not unconscionable in the circumstances, and
related penalties/charges are not excessive or abusive.

But if the total charges become oppressive—especially through high monthly rates, compounding, and stacked penalties—Philippine courts may reduce the rate, trim penalties, and apply legal interest (often 6%) as a judicial fallback in appropriate phases of the obligation or judgment.

If you want, paste (remove personal details) the interest/default/penalty provisions of a sample loan clause, and I can annotate which parts are typically enforceable and which parts are most likely to be reduced in court.