Challenging Excessive Interest on Delayed Loan Payments in the Philippines

A practitioner-oriented guide to the rules, defenses, remedies, and calculations

1) The baseline legal framework

Freedom to contract—but not without limits. Parties may agree on interest and default charges (Civil Code, Art. 1306), but stipulations are void if they violate law, morals, good customs, public order, or public policy.

Usury ceilings are suspended, not dead. The Usury Law (Act No. 2655) set rate caps long ago, but Central Bank (now BSP) Circular No. 905 (1982) suspended those ceilings. This does not mean “anything goes.” Courts still strike down unconscionable or iniquitous rates and reduce penalties.

Interest must be in writing. No interest may be charged unless expressly stipulated in writing (Civil Code, Art. 1956).

Penalty clauses and liquidated damages are reducible. Even if validly agreed, courts may equitably reduce penalties or liquidated damages when they are iniquitous or unconscionable (Civil Code, Arts. 1229 and 2227).

Legal (default) rate. For loans/forbearance of money, the Supreme Court now applies 6% per annum as the legal interest rate (replacing the old 12%) per Nacar v. Gallery Frames (2013), aligning with BSP Circular No. 799 (2013). This governs when:

no rate is stipulated; or
a stipulated rate is void/unconscionable and the court substitutes a reasonable/legal rate; or
interest accrues by way of damages from default or from a final judgment.

Compound interest (“interest on interest”). Prohibited unless expressly stipulated and then only after interest has become due (Civil Code, Arts. 1959 and 2212). Even if stipulated, courts may still strike down oppressive compounding.

Disclosure rules. The Truth in Lending Act (RA 3765) and BSP/SEC regulations require clear disclosure of the finance charge and effective interest rate. Hidden or mislabelled charges can be challenged as unfair or void for lack of disclosure/consent.

Sector-specific caps & conduct rules (quick orientation).

Banks/credit cards: BSP issues circulars capping certain card finance charges and late fees, and prohibits unfair collection.
Lending/financing companies and online lending platforms (OLPs): Regulated by the SEC under RA 9474 (Lending Company Regulation Act), RA 8556 (Financing Company Act), the Financial Consumer Protection Act (RA 11765), and SEC debt-collection rules (e.g., anti-harassment provisions).
Even when a cap applies only to a sector (e.g., small-value short-term loans or card receivables), its policy logic often informs courts’ unconscionability analysis in other contexts.

2) Landmark Supreme Court guidance on excessive interest

The Supreme Court has repeatedly voided or reduced exorbitant rates. Core themes:

“Unconscionable” = void or subject to reduction.
- Medel v. Court of Appeals (1998): Monthly rates producing ~66% p.a. were unconscionable; reduced to a reasonable rate.
- Numerous cases thereafter struck 3%–6% per month, especially when combined with separate penalty interest and late fees (“double or multiple exactions”).
- Courts also prune attorney’s fees and liquidated damages when oppressive.
Courts distinguish “compensatory interest” from “penalty interest.” Stacking both at high levels for the same default is disfavored; one may be reduced or removed to avoid punitive duplication.
When a rate is void, courts often default to 6% p.a. Following Nacar (and Eastern Shipping Lines v. CA for earlier periods), courts apply 6% p.a. (not 12%) from default/demand (for loans/forbearance) and 6% p.a. from finality of judgment until full satisfaction.

3) What counts as “excessive” or “unconscionable”?

There is no fixed nationwide cap for all private loans, but these red flags commonly lead to a judicial haircut:

Sky-high monthly rates (e.g., 3%–10% per month) especially when paired with:
- a separate “penalty interest” (another 2%–5% per month), and
- late fees/collection charges, or compounding without clear written consent.
Misleading disclosure of the effective annual rate (EAR) or “finance charge” (TILA violations).
Adhesion contracts with take-it-or-leave-it terms, particularly in micro-loans or payday-style lending.
Harassing collection practices (public shaming, threats). Even if principal is due, abusive practices can support damages, regulatory complaints, and an equitable reduction of charges.

Courts look at totality: borrower sophistication, bargaining power, context (emergency loan vs. commercial facility), market comparables, regulatory policy, and whether charges shock the conscience.

4) How interest actually accrues (and how courts fix it)

A. If a valid written rate exists:

Apply the stipulated rate on principal until default.
From default (usually an extra-judicial demand letter or due date + grace period), either:
- continue the stipulated rate if not unconscionable, or
- if unconscionable, court reduces to a reasonable figure (commonly 6% p.a.) from default.

B. If there is no valid written interest clause:

0% until default (no interest may be charged under Art. 1956).
From default, 6% p.a. as damages on the unpaid principal.

C. Penalty interest / liquidated damages:

May be reduced under Arts. 1229/2227.
Courts often choose one meaningful sanction (e.g., 6% p.a. damages) rather than a stack of penalties.

D. Post-judgment interest (all money judgments):

6% p.a. from finality of judgment until fully paid (Nacar).

E. Compounding:

Requires express written stipulation and still subject to equitable reduction.

5) Building your challenge: documents, numbers, narratives

Collect and preserve:

Loan documents: promissory note, disclosure statement, schedule of fees, addenda, renewal/rollover papers, receipts.
Demands & communications: emails, texts, app screenshots, call logs.
Accounting: lender statements, your own spreadsheet of principal vs. interest vs. penalties, dates of each charge.
Collection conduct: evidence of harassment, doxing, or illegal contact practices (screenshots, witnesses).
Regulatory status: the lender’s license/registration (banks: BSP; lending/financing: SEC). Unlicensed entities face separate penalties; their contracts may be attacked for illegality and public policy.

Recalculate the debt (typical litigation format):

Start with principal actually received (net of any front-loaded “service fees” you never enjoyed; challenge them as undisclosed finance charges).
Strip out unconscionable rates/penalties; replace with a reasonable rate (often 6% p.a.) from default.
Apply payments first to interest due, then principal only if the interest is valid; otherwise, allocate to principal.
Recompute running balance to judgment; add 6% p.a. from finality thereafter.

6) Causes of action & defenses (what to plead or raise)

As plaintiff (affirmative suit):

Declaration of nullity or reformation of interest/penalty stipulations;
Accounting & recomputation;
Damages for unfair collection (moral, exemplary), refund of overpayments, attorney’s fees;
Injunction to stop harassment/illegal disclosures;
Consignation (if tender refused) to stop interest accrual.

As defendant (when sued for collection):

Interest not in writing (Art. 1956) → disallow interest before default;
Unconscionability → reduce rate and penalties;
No valid compounding stipulation;
Partial payments misapplied;
Predatory/unlicensed lender;
TILA disclosure defects;
Violation of regulatory caps/policies (where applicable);
Laches/prescription (see §9).

Small Claims as a tactical option. As of recent rules, small claims (no lawyers required at hearing) cover money claims up to ₱1,000,000—useful for micro-lending disputes. (Check the latest Small Claims Rules for any threshold updates.)

7) Evidence of abusive collection (and why it matters)

Public shaming (group texts, contacting employer/contacts), threats, or obscene language violate SEC/BSP conduct rules and can also be tortious.
Such evidence supports:
- Damages (moral/exemplary),
- Administrative complaints (BSP for banks; SEC for lending/financing/OLPs),
- Equitable reduction of charges and attorney’s fees in your favor.

8) Practical step-by-step playbook

Request an itemized statement and full TILA disclosures (finance charge, APR/EIR, fee breakdown). Demand the contract if you only saw an app screen.
Send a written demand to recompute: cite Art. 1956, Arts. 1229/2227, Nacar, and “unconscionability.” Offer to pay the undisputed principal plus 6% p.a. from default (or the reasonable rate you propose).
Tender & consign the undisputed amount if the lender refuses—this halts further interest on that amount.
File administrative complaints for abusive collection or unlicensed operations (BSP/SEC/DTI, and NPC for Data Privacy Act violations).
Litigate (or be ready to): seek declaratory relief/reformation, accounting, and damages; or raise these as defenses/counterclaims in a collection case.
Prepare your numbers (clean recomputation). Judges respond well to clear tables separating principal, valid interest, void interest/penalties, and the corrected balance.

9) Timeliness, venue, and jurisdiction

Prescription: Actions on a written contract prescribe in 10 years (Civil Code, Art. 1144). Open accounts or quasi-contracts may be 4–6 years, depending on theory.
Venue & court: The MTC generally has jurisdiction up to ₱2,000,000 (RA 11576); above that, RTC. (Always check current thresholds.)
Small Claims: Up to ₱1,000,000 for purely money claims (latest amendments); ideal for rapid resolution.

10) Frequently used pleadings language (adaptable snippets)

On unconscionability: “The stipulated monthly interest of __% (annualized at __%) coupled with an additional penalty of __% per month and late fees constitutes an iniquitous and unconscionable imposition proscribed by public policy. Under Arts. 1229 and 2227, the Court may equitably reduce or nullify such charges. In Medel and progeny, the Court invalidated similarly exorbitant rates.”
On absence of written stipulation: “Under Art. 1956, interest cannot be charged absent a written stipulation. Any interest collected prior to default is illegal and must be refunded. Only 6% p.a. as damages may accrue from default.”
On compounding: “Compounding is disallowed absent an express written stipulation and, even if present, may be reduced when iniquitous (Arts. 1959, 2212).”
On post-judgment interest: “Consistent with Nacar, the proper post-judgment rate is 6% p.a. from finality until full satisfaction.”

11) Compliance checklist for lenders (useful when negotiating)

Provide written interest/fee terms; state APR/EIR and finance charge.
Avoid stacking high regular interest plus high penalty interest and late fees.
If compounding, say so expressly and periodically (monthly/quarterly), with borrower acknowledgment.
Ensure licensing/registration and follow BSP/SEC conduct standards (no harassment, no contact-list scraping).
Maintain clear ledgers; apply payments first to valid interest due, then principal; avoid retroactive rate changes.

12) Worked micro-example (logic you can mirror in court)

Principal actually received: ₱50,000
Contract says: 4% per month interest + 3% per month penalty after due date; compounded monthly (no clear written compounding clause shown).
You defaulted on Jan 15, 2024; you paid ₱10,000 on Apr 15, 2024; lender claims ₱120,000 balance today.

Challenge & recompute:

Invalidate compounding (no express written stipulation) and reduce rates as unconscionable.
Apply 6% p.a. simple interest from Jan 15, 2024 (default) to Apr 15, 2024 (payment) = ₱50,000 × 0.06 × (90/365) ≈ ₱739.73.
Apply payment ₱10,000 to interest first (₱739.73), balance to principal (₱9,260.27). New principal ≈ ₱40,739.73.
Run 6% p.a. simple interest on that corrected principal to the present; the true balance will be a fraction of the lender’s inflated claim. Present this in a clear table.

13) Regulatory & complaint avenues (quick map)

BSP – Banks/credit card issuers; unfair practices; rate caps for cards; disclosure violations.
SEC – Lending/financing companies and OLPs; licensing; unfair debt collection (e.g., public shaming); sectoral interest/fee caps where applicable.
DTI – Deceptive sales/advertising practices (consumer side).
NPC – Data Privacy Act complaints (contact scraping, disclosure to third parties).
NBI/PNP – Harassment, threats, and other criminal aspects.

14) Common pitfalls to avoid

Paying “whatever they say” without getting the itemized breakdown and contract.
Admitting the whole debt in writing (e.g., “I owe ₱___”) before your recomputation—this can revive prescription and undercut defenses.
Ignoring prescription—time bars can be decisive.
Assuming compounding is automatic or that high “industry practice” rates are sacrosanct. They’re not.

15) Quick references to plead and cite (by concept)

Art. 1956 (interest must be in writing)
Arts. 1229, 2227 (court may reduce penalties/liquidated damages)
Arts. 1959, 2212 (interest on interest/when allowed)
Art. 1306 (freedom of contract bounded by law/policy)
Art. 1144 (10-year prescription for written contracts)
Nacar v. Gallery Frames (2013) (6% p.a.; post-judgment interest)
Eastern Shipping Lines v. CA (1994) (older interest framework; still cited for periodization)
Medel v. CA (1998) and progeny (unconscionable interest reduced)
RA 3765 (Truth in Lending Act); RA 11765 (Financial Consumer Protection Act)
BSP/SEC circulars (disclosure, collection conduct, sectoral caps)

16) Bottom line

Even without a universal usury cap, Philippine law arms borrowers with strong tools to invalidate or reduce excessive interest, penalties, and abusive fees.
The play is to audit the math, attack the unlawful stipulations, and present a clean recomputation anchored on 6% p.a. (when appropriate), backed by Arts. 1956, 1229, 2227 and Nacar/Medel line of cases.
Pair the math with regulatory complaints if collection turned abusive; that pressure often brings lenders to the table.

This article is informational and not a substitute for tailored legal advice on specific facts. If you want, I can turn your actual contract and statements into a litigation-ready recomputation and draft demand letter.