Usury, “Unconscionable” Interest, and Borrower Remedies

Scope and purpose

This article discusses (1) when interest becomes excessive or legally vulnerable in the Philippine setting, (2) what “usury” means today after deregulation, (3) how courts treat harsh interest, penalties, and charges, and (4) borrower remedies against both excessive pricing and abusive collection.

1) Key concepts: debt, interest, and “charges” that function like interest

Loan (mutuum) vs. other money obligations

Most disputes arise from a loan (Civil Code “mutuum”), evidenced by a promissory note, loan agreement, or even an informal acknowledgment. But interest rules also show up in:

Forbearance of money (delay in paying a due amount, extensions, restructurings)
Installment sales and credit transactions (often governed by special rules on remedies and disclosures)
Secured loans (real estate mortgage, chattel mortgage, pledge)

What counts as “interest” in practice

Lenders sometimes label costs as:

service fees / processing fees
“handling” fees
collection fees / field visit fees
late payment charges / penalty fees
attorney’s fees (flat % add-ons)

Courts and regulators often look at substance over label: if a charge is effectively the price for using money, it may be treated like interest or scrutinized similarly—especially if it balloons the total cost or is imposed automatically without proof of actual expense.

2) Usury in the Philippines: what changed, what remains

The Anti-Usury Law and deregulation

Historically, the Philippines had statutory ceilings under the Usury Law (Act No. 2655, as amended). The major practical change came when the Monetary Board (then under the Central Bank, now BSP) lifted/suspended interest ceilings through Central Bank Circular No. 905 (1982). The result is often summarized this way:

There is generally no fixed statutory ceiling for interest on private loans because ceilings were lifted.
But that does not mean “any rate is automatically valid.” Courts can still strike down or reduce interest and penalties that are unconscionable or contrary to law, morals, good customs, public order, or public policy.

“Usury” today: narrower, but not meaningless

Because ceilings were lifted, classic “usury” (charging above a legal cap) is less common unless a specific cap applies (some financial products can be subject to BSP/SEC rules). In everyday litigation, the fight usually shifts from “usury” to:

lack of a written interest stipulation, or
unconscionable interest / iniquitous penalty, or
illegal/abusive collection practices, or
non-disclosure / unfair dealing under consumer-protection frameworks.

3) The Civil Code rules that matter most

A. Interest must be in writing (a frequent game-changer)

Civil Code, Article 1956: No interest is due unless it has been expressly stipulated in writing.

Practical effect:

If the loan agreement does not have a written interest clause, the lender generally cannot collect contractual interest (even if there was a verbal agreement).
However, if the borrower is in delay (default), the lender may claim legal interest as damages under the rules on delay and monetary obligations (discussed below), typically from demand.

B. If interest was paid when none was due

Civil Code, Article 1960 (principle): interest paid without a written stipulation may be treated as paid by mistake and may be recoverable or reapplied to principal, depending on the circumstances and how the case is framed.

C. Penalty clauses can be reduced by the courts

Where contracts impose a penalty (e.g., “penalty interest,” “late charge,” liquidated damages), the court has power to reduce it if it is iniquitous or unconscionable:

Civil Code, Article 1229: courts may reduce penalties if they are inequitable, and also when the principal obligation has been partly or irregularly complied with.

This is routinely invoked against:

penalty interest stacked on top of regular interest
automatic % “collection fee” add-ons
attorney’s fees set at a high % without proof of reasonableness

D. Interest as damages for delay (default)

For monetary obligations:

Civil Code, Article 2209 (core rule): if the obligation is to pay a sum of money and the debtor incurs delay, damages are the agreed interest, and in the absence of stipulation, legal interest.

E. “Interest on interest” (anatocism)

As a general principle, unpaid interest does not automatically earn interest, except in legally recognized situations (e.g., when judicially demanded or when validly capitalized under recognized rules and jurisprudence). Courts scrutinize compounding—especially when it accelerates the debt in a way that looks punitive.

4) Legal interest in the Philippines (default rate, judgments, and timing)

The baseline: 6% per annum in modern doctrine

The Supreme Court’s guidance (commonly applied after BSP Monetary Board action lowering the legal rate) is that the legal interest rate is generally 6% per annum, with structured rules depending on the nature of the obligation and whether the amount is already adjudged.

A widely used framework in practice (from Supreme Court doctrine on legal interest) is:

If the obligation is a loan/forbearance and there’s a stipulated interest rate
- Apply the stipulated rate unless it is struck down or reduced for being unconscionable/contrary to law or policy.
If the obligation is a loan/forbearance but there is no valid stipulated interest
- Apply legal interest (commonly 6% p.a.) from extrajudicial or judicial demand, depending on the facts and rulings in the case.
Once a money judgment becomes final and executory
- The adjudged amount typically earns 6% p.a. until fully paid.

Why timing matters: Many disputes are really about when interest starts running:

date of default stated in contract
date of demand letter receipt
date of filing of the complaint
date of judgment finality

5) “Unconscionable” interest: the doctrine borrowers use most

What “unconscionable” means in Philippine loan cases

Even without strict usury caps, Philippine courts have repeatedly held that interest can be voided or reduced when it is excessive, iniquitous, unconscionable, or shocking to the conscience.

Common indicators courts consider:

extraordinarily high monthly interest (especially when annualized, it becomes extreme)
interest plus penalties that quickly dwarf the principal
adhesion contracts where the borrower had no real bargaining power
repeated renewals/rollovers that snowball charges
lender behavior showing oppression or bad faith (sometimes considered in equity)

Typical judicial outcomes

When a court finds interest unconscionable, it commonly:

nullifies the interest stipulation (wholly or partly), and/or
reduces it to a reasonable level (often reverting to legal interest), and/or
strikes down or reduces penalty interest and excessive add-on charges under Article 1229.

Important nuance: there is no single “magic number”

Philippine rulings do not apply a universal threshold like “X% per month is always illegal.” Courts decide case-by-case, which means:

the same numeric rate may be treated differently depending on context
the structure (fees + penalties + compounding + acceleration) can be as important as the headline rate

6) Penalties, collection fees, and attorney’s fees: how they get challenged

A. Penalty interest on top of regular interest

Contracts often impose:

regular interest (price of money), plus
penalty interest (punishment for delay), plus
fixed collection costs, plus
attorney’s fees

Courts frequently treat this stack as potentially punitive, and will reduce it if the total burden becomes inequitable.

B. Attorney’s fees are not automatic “because the contract says so”

Even if a contract states “attorney’s fees = 25%,” courts typically still assess reasonableness, and may reduce or deny if:

there’s no factual/legal basis under Civil Code, Article 2208
the amount is unconscionable
it is being used as a disguised penalty

C. “Collection fees” need scrutiny

Flat “collection fees” that are added automatically (e.g., a % of the outstanding balance) are vulnerable when:

they are not tied to actual costs
they are duplicative of penalty interest/attorney’s fees
they function as disguised interest

7) Borrower remedies against excessive interest (civil-law toolkit)

Remedy 1: Use Article 1956 as a shield

If there is no written interest stipulation, a borrower can:

deny liability for contractual interest, and
demand that payments be applied to principal first, or seek reapplication.

Remedy 2: Ask the court to reduce penalties under Article 1229

This targets penalty interest, liquidated damages, and oppressive add-on charges.

Remedy 3: Attack unconscionable interest as void/ineffective

In a collection case, the borrower typically pleads:

the interest is unconscionable/iniquitous
it violates public policy
the court should reduce it to a reasonable rate or legal interest

Remedy 4: Accounting, recomputation, and reapplication of payments

Where the borrower has paid amounts that were booked as interest/penalties under a void or reduced stipulation, common requested relief includes:

judicial recomputation of the true balance
reapplication of payments to principal
in appropriate cases, refund or credit of overpayment

Remedy 5: Defensive strategies in court

In litigation, practical borrower moves often include:

requiring strict proof of the loan disbursement and ledger
challenging authenticity/consent (when signatures or terms are disputed)
disputing add-on fees not supported by contract or proof
invoking barangay conciliation issues (where required)
questioning venue/jurisdiction where incorrectly filed

Remedy 6: Injunction in narrow cases

If enforcement (e.g., foreclosure or repossession) proceeds with alleged illegality, borrowers sometimes seek injunctive relief—though courts generally require a strong showing of a clear right and urgent, irreparable injury.

8) Borrower remedies against abusive debt collection (harassment, threats, shaming)

A. No imprisonment for mere nonpayment of debt

The Constitution prohibits imprisonment for debt. A lender cannot legitimately threaten jail solely because a loan is unpaid.

But criminal exposure can exist if there is an independent offense, such as:

B.P. Blg. 22 (bouncing checks) where a check was issued and dishonored under the statute’s elements
Estafa (fraud) where deceit/abuse of confidence and other elements are proven
other crimes based on the collector’s conduct (below)

B. Collector conduct that can trigger criminal liability

Depending on facts, aggressive collection may amount to:

Grave threats / light threats (threatening harm or a crime)
Unjust vexation / coercion type conduct (harassing, forcing, humiliating)
Slander, libel, including cyber libel if posted online
Identity-related misconduct (impersonating a lawyer/officer, depending on acts)

The viability depends heavily on what was said/done, how it was communicated, and evidence.

C. Data privacy as a major modern remedy (especially vs. online lenders)

If a lender/collector:

accesses phone contacts without a lawful basis,
messages friends/employers,
posts the borrower’s debt publicly,
discloses personal data beyond what is necessary,

that can implicate the Data Privacy Act (R.A. 10173) and related enforcement by the National Privacy Commission (NPC), and can support civil claims for damages in appropriate cases. Evidence is critical: screenshots, call logs, message threads, app permissions, and witnesses.

D. Regulator-based protections (complaint routes)

The appropriate forum depends on the lender type:

Banks and BSP-supervised institutions: BSP consumer channels and the broader financial consumer protection framework
Lending/financing companies: typically SEC (registration, licensing, and conduct oversight)
Cooperatives: CDA mechanisms
Pawnshops: generally BSP-regulated

Modern Philippine policy has increasingly emphasized “market conduct” and fair treatment, including restrictions on abusive collection behavior.

9) Truth in Lending and disclosure: why it matters for excessive cost disputes

Truth in Lending Act (R.A. 3765) basics

Philippine law requires creditors to disclose the true cost of credit (finance charges, effective rates, and key terms) so borrowers can understand what they are paying.

Where disputes arise:

borrowers discover that “low interest” was paired with huge fees
effective annual rates become extreme when monthly fees and penalties are counted
terms were not clearly explained or provided in writing

Depending on the creditor and circumstances, non-compliance can lead to administrative exposure and strengthen borrower arguments that charges should not be enforced as imposed.

10) Security and enforcement: mortgages, repossession, deficiency, and common misconceptions

A. Real estate mortgage (REM) and foreclosure

If a loan is secured by a real estate mortgage, foreclosure can be:

extrajudicial (common, if the mortgage contains a power of sale and statutory requirements are met), or
judicial

Even if foreclosure is proper, disputes often remain on:

the correctness of the stated obligation (interest/penalties)
compliance with notice/publication requirements
whether deficiency remains after sale and whether it is collectible (generally yes for mortgages, subject to special rules)

B. Chattel mortgage and repossession

For loans secured by personal property, enforcement depends on the security instrument and applicable law. Disputes often involve:

whether seizure was lawful (no breach of peace, no illegal trespass)
whether sale requirements were met
whether deficiency is claimed correctly

C. Installment sales and the “Recto Law” idea

In installment sales of personal property, the seller’s remedies can be limited in ways that affect deficiency claims when repossession/foreclosure is chosen. This is frequently misunderstood and depends on the true nature of the transaction (sale vs. loan).

11) Procedure in collection cases: what borrowers actually face

A. Demand and default

Many cases turn on whether there was:

a valid demand (written, received)
a contractual default clause
acceleration (entire balance becoming due)

B. Barangay conciliation (Katarungang Pambarangay)

For many disputes between individuals residing in the same city/municipality, barangay conciliation is a precondition before filing in court, subject to statutory exceptions (e.g., parties in different localities, urgent legal action, certain cases).

Failure to comply can lead to dismissal or procedural delays.

C. Small claims vs. regular civil cases

Creditors often use small claims for simpler collection, while complex disputes (validity of interest, damages counterclaims, injunction requests) may proceed as regular civil actions. Thresholds and rules can change over time, so the chosen procedure depends on the claim amount and current court rules.

D. Evidence that typically decides the case

Borrowers should expect lenders to present:

promissory notes / loan agreements
disbursement proof
statements of account and ledgers
demand letters
proof of payments and allocation

Borrowers commonly contest:

authenticity or consent to certain terms
unexplained charges
allocation of payments (interest-first vs. principal-first)
missing disclosure documents
arithmetic and compounding

12) Practical analysis: spotting legally vulnerable “excessive interest” structures

Red flags that often trigger judicial reduction or invalidation:

Interest not written but being collected
Very high monthly rates that, when annualized, become extreme
Penalty interest that is equal to or higher than regular interest
Multiple overlapping charges (penalty + late fee + collection fee + attorney’s fees)
“Rolling” renewals where fees eat the principal and the balance barely declines
Compounding that rapidly multiplies debt without clear written consent and justification
Collector behavior that shows oppression (threats, public shaming, contact harassment)

13) Common borrower questions answered

“Is 5-6 lending automatically illegal?”

Not automatically. Private lending as such is not per se illegal; the legal issues usually come from:

unconscionable interest/penalties
lack of a written interest agreement
abusive or illegal collection conduct
licensing issues if the lender is operating as a regulated lending/financing business

“Can the lender add 25% attorney’s fees immediately after default?”

Courts often treat automatic % attorney’s fees with skepticism and may reduce or disallow if unreasonable or unsupported.

“Can they contact my employer, friends, or family?”

Contacting third parties to shame or pressure payment can raise serious legal risk for collectors, particularly under data privacy principles and general protections against harassment and defamation, depending on what was disclosed and how.

“Can I go to jail for an unpaid loan?”

Not for mere nonpayment. Jail threats are often unlawful intimidation unless tied to an actual, independently provable crime (e.g., bouncing checks under B.P. 22 with the required elements).

14) Borrower action map (remedy selection by problem type)

Problem: Interest is being charged but not written

Invoke Civil Code Art. 1956 to dispute contractual interest
Seek recomputation and reapplication of payments
If already paid, consider recovery/recredit theories (including mistake/undue payment concepts)

Problem: Interest/penalties are written but extreme

Plead unconscionability; request judicial reduction
Invoke Art. 1229 to reduce penalty charges
Demand a full accounting and contest compounding/add-ons

Problem: Harassment, threats, public shaming

Preserve evidence (screenshots, recordings where lawful, logs, witnesses)
Consider criminal complaints where elements are present (threats, coercion, defamation, cyber-related offenses)
Consider Data Privacy Act remedies if personal data was misused or disclosed
File complaints with the correct regulator if the lender is regulated (BSP/SEC/CDA, as applicable)

Problem: Foreclosure/repo while disputing interest

Verify statutory and contractual compliance (notices, procedures, accounting)
Consider court relief if there is a strong legal basis (including recomputation and, in narrow cases, injunctive relief)

15) Bottom line principles (Philippine context)

Interest must be expressly agreed to in writing to be collectible as contractual interest.
Even after interest-rate deregulation, courts can strike down or reduce unconscionable interest and penalties.
Penalty clauses and add-on charges are especially vulnerable to reduction when they become oppressive.
Abusive debt collection can create liability independent of the debt—through criminal law, civil damages, and data privacy enforcement.
Outcomes are often driven by documentation and math: the written stipulations, disclosures, demands, and the correctness of recomputation.