Cancellation Fees and Terms in Online Lending Contracts (Philippines) Comprehensive doctrinal-and-regulatory overview (Updated as of 18 June 2025; for information only, not a substitute for legal advice)
1. Why “cancellation” matters in digital credit
Online lending apps disburse funds within minutes, usually on the back of a one-page click-wrap contract. Borrowers occasionally change their minds—before signing, after e-signing but before disbursement, or after the loan is already running. Each stage raises a different “cancellation” or early-termination scenario:
| Stage | Typical borrower request | Legal label | Practical result |
|---|---|---|---|
| Before clicking “Accept” | “Delete my draft application.” | Withdrawal of offer | No fee may be imposed; there is no perfected contract (Art. 1319, Civil Code). |
| After e-signing, before funds are credited | “I want to back out.” | Cooling-off or rescission ab initio | Fees limited by Sec. 11765 (FPSCPA) implementing rules; lender may recover reasonable processing costs actually incurred. |
| After disbursement, borrower pays in full ahead of schedule | “I’m prepaying.” | Pre-termination / early repayment | Only interest for the period actually elapsed may be collected; prepayment penalties are lawful only if clearly disclosed and not unconscionable. |
| Borrower defaults and wants to walk away | “I’m cancelling further use of the loan.” | Dacion en pago / settlement | Governed by contract & Art. 1245, Civil Code; lender may stipulate reasonable break-costs but caps apply (see § 4.4). |
2. Core statutory and regulatory framework
| Instrument | Key provisions on cancellation & fees |
|---|---|
| Civil Code (1949) | Arts. 1159, 1189, 1191, 1306, 1311-1324 (consent, rescission, mutual restitution). |
| Truth in Lending Act – RA 3765 & BSP Circular 730 (2011) | Full disclosure of finance charges including “loan cancellation or pre-payment penalties.” |
| Lending Company Regulation Act – RA 9474 (2007) & SEC Memorandum Circular (MC) 18-2019, MC 3-2022 | Online lenders must lodge their standard form contracts; SEC may void hidden or excessive fees; interest-rate ceiling: 0.1 %/day (≈3 % p.m.) and penalty ceiling: 5 % of unpaid amount, once (effective 03 Nov 2023). |
| Financial Products and Services Consumer Protection Act – RA 11765 (2022) | Cooling-off right: borrower may cancel within the period the regulator fixes (SEC: 2 banking days for loans ≤₱50 000). Unreasonable cancellation clauses are void. |
| BSP Circular 1165 (2023) | Caps pre-termination fees on credit cards at ₱300 or 1 % of principal, whichever is lower. While addressed to banks, SEC reads it as persuasive for fintech lenders. |
| Data Privacy Act – RA 10173 (2012) | Upon cancellation, borrower may invoke right to erasure of personal data no longer necessary. |
| Usury Law (Act 2655) & CB Circular 905 (1982) | Interest ceilings lifted, but public-policy test of “unconscionability” still applies to any cancellation fee (Art. 1306 in relation to Art. 24, Civil Code). |
3. Cancellation mechanics under Philippine contract doctrine
Perfection and formation – A loan contract is perfected only when (a) the parties agree on the object (money) and the cause (repayment with interest) and (b) the money is delivered (Art. 1934). Therefore:
- Withdrawal before disbursement cancels the offer; no penalty can arise because the loan is not yet real.
Cooling-off under RA 11765 –
- SEC’s IRR (MC 7-2023) sets a mandatory 2-day period for micro-loans (≤ ₱50 000, ≤ 12 months).
- Lenders may charge only documented out-of-pocket costs (e.g., credit bureau pull, e-signature service).
- Any blanket “₱2 000 cancellation fee” is void for being unreasonable.
Pre-termination – Unless the contract expressly prohibits or regulates early repayment, the borrower may tender full payment any time (Art. 1256) and interest stops accruing.
Penalties for early payoff are lawful if:
- Disclosed in pesos and APR terms in the Pre-Contract Disclosure Statement (PCDS) under RA 3765;
- Do not cause total finance charge to exceed the SEC/BSP ceilings.
Mutual rescission after disbursement – Parties may agree to unwind, but lender must return interest/fees for the unused period (Art. 1385).
4. Limits on the size and structure of cancellation fees
| Type of charge | Absolute caps | Additional constraints |
|---|---|---|
| Cooling-off fee | Actual costs only (no mark-up) per SEC MC 7-2023. | Must be itemised in writing within 3 days of cancellation. |
| Early-repayment / break-funding cost | Not > 1 % of principal or ₱500 (whichever is lower) for loans ≤₱10 000; negotiable but must be “nominal” for bigger loans. | Cannot be capitalised into principal; cannot earn further interest. |
| Processing fee forfeiture | Allowed if expressly non-refundable and equal to or lower than the actual expense (e.g., ₱150 credit check). | |
| Penalty for post-disbursement rescission | Aggregate of (a) interest that accrued to date + (b) cap of 5 % one-time late charge. | Stacking multiple penalty provisions is prohibited (Sec. 6, SEC MC 3-2022). |
5. Void or unenforceable cancellation clauses
A term will be struck down by courts or regulators if it:
- Imposes liquidated damages “at lender’s sole discretion.” This violates the rule that liquidated damages must be determinable (Art. 1349).
- Lets the lender keep “application” or “service usage” data indefinitely. Contravenes the Data Privacy Act’s data-retention principle.
- Requires borrower to waive statutory rights (e.g., cooling-off). Any waiver of a right intended for public interest is void (Art. 6, Civil Code; Sec. 21, RA 7394).
- Charges interest for the entire original tenor after early payoff. Runs afoul of the doctrine of quantum meruit and the Truth in Lending Act.
6. Enforcement landscape
| Agency | Power | Typical penalty for abusive cancellation fee |
|---|---|---|
| SEC—Financing and Lending Division | Suspend or revoke CA/LCO licence; impose ₱10 000-₱1 million fine per violation (Sec. 12-13, RA 9474). | |
| Bangko Sentral ng Pilipinas (BSP) | For banks/EMIs: enforce Circular 1165 caps; order restitution. | |
| DTI (for BNPL providers that are not “lending companies”) | Issue cease-and-desist; up to ₱300 000 fine; closure. | |
| National Privacy Commission | Administrative fines up to 2 % of annual gross income for data retention violations. | |
| Courts / Arbitration | Award damages, declare clause void, or order restitution with legal interest (currently 6 % p.a.). |
7. Drafting & compliance checklist for online lenders
- Put the cancellation matrix up front. Use a one-page “Key Facts Statement” (KFS) to show: (a) how to cancel, (b) cut-off time, (c) exact peso cost.
- Automate the cooling-off button. A borrower toggle inside the app that triggers automatic reversal and fee computation within 24 hours.
- Break-cost formula:
Break Cost = (Outstanding Principal × Funding Rate Differential × Remaining Term ÷ 365)
+ Early Termination Fee (capped)- Disclose in APR. Add the cost of any cancellation fee into the Total Cost of Credit (TCC) calculation.
- Segregate data. Tag cancelled loan files and purge personal data within 14 days, except what AML rules require.
- Keep call-logs and screenshots. SEC examiners often require evidence that the borrower genuinely activated the cancel feature.
- Train collection staff. Attempting to collect an unlawful cancellation fee is harassment (SEC MC 18-2019, Sec. 1-(k)).
8. Borrower tips
- Act quickly. The cooling-off clock starts once you receive the PCDS or click “Accept,” whichever is earlier.
- Use in-app channels. Oral cancellation by phone may not create a verifiable audit trail.
- Insist on a revised statement of account after pre-payment—interest should be recomputed to the exact date of payoff.
- Screenshot everything. Evidence helps if you file a complaint with the SEC or NPC.
9. Looking ahead
Regulators are converging on consumer-friendly ceilings and automatic “click-to-cancel” functions. Draft guidelines circulated in April 2025 propose:
- Enlarging the cooling-off window to 3 business days for first-time borrowers.
- Mandating zero pre-termination fee for loans ≤ ₱5 000.
- Integrating cancellation notices with e-BIR Forms for automatic documentary-stamp fee refunds.
Expect these to be finalised before Q4 2025. Lenders should begin upgrading their loan-origination systems now.
10. Conclusion
Philippine law does not forbid cancellation or early repayment fees per se, but it polices them aggressively through disclosure mandates, statutory caps, and the new-generation consumer-protection regime under RA 11765. Any fee that is (1) not fully disclosed, (2) disproportionate to actual cost, or (3) designed to trap consumers in debt will likely be voided, with the lender facing fines and reputational risk. Both borrowers and fintech operators should treat cancellation terms not as afterthoughts but as core elements of responsible digital-credit design.