A practical legal article in Philippine context (general information, not legal advice).

1) Why “excessive interest” is still a live issue in the Philippines

In the Philippines, the idea of “usury” (charging interest beyond a legal ceiling) exists in law and history, but in modern practice there is generally no fixed statutory interest ceiling for most private loans because the old ceilings were effectively lifted. Even so, Philippine courts still police interest rates through doctrines like unconscionability, equity, and public policy—meaning a rate can be reduced or disregarded if it is shocking, iniquitous, or oppressive, even if the borrower signed the contract.

So the modern question is usually not “Is this usurious under a numerical cap?” but: “Is this interest rate (and related charges) unconscionable under the circumstances?”

2) The legal framework: where the rules come from

A. Civil Code: the core rules on interest

Key principles under the Civil Code that drive almost all interest disputes:

Interest must be expressly stipulated in writing (commonly cited rule: no written stipulation, no conventional interest).
- If the loan contract is silent, or the interest term is not in writing, the lender generally cannot collect “agreed” interest—though damages/interest by way of indemnity may still apply in proper cases (see legal interest below).
Freedom to contract is not absolute. Parties may agree on terms, but stipulations contrary to law, morals, good customs, public order, or public policy can be struck down or modified.
Courts can reduce penalties and liquidated damages if unconscionable. Even if the contract calls something a “penalty,” “service fee,” “late charge,” or “liquidated damages,” courts look at substance. Excessive add-ons can be reduced.

B. The Usury Law and the “lifting” of ceilings

Historically, the Usury Law set ceilings. In modern Philippine lending, the ceilings were effectively lifted by central monetary authorities (commonly associated with the issuance of Central Bank Circular No. 905), leading to a regime where interest rates are largely market-driven.

Important consequence:

You cannot assume an interest rate is illegal merely because it is high.
But you also cannot assume it is enforceable merely because it was agreed. Unconscionability review remains.

C. Special laws and regulators: disclosure and sector-specific controls

Even without a universal ceiling, certain industries are regulated through licensing, disclosure, and consumer protection, such as:

Truth in Lending Act (RA 3765): focuses on clear disclosure of the true cost of credit (finance charges, effective rates). Weak disclosure can undermine enforcement and expose lenders to liability.
Regulatory regimes for lending/financing companies and pawnshops: these typically require compliance with registration/licensing and fair dealing, and may impose rules on charges, documentation, and reporting.
Consumer protection and BSP/financial regulator issuances (where applicable): often more relevant to banks, quasi-banks, and regulated financial products.

3) The three “interest” concepts Philippine courts deal with

A lot of disputes happen because parties mix these up:

Conventional interest
- The interest agreed by the parties as the price of using money (e.g., “3% per month”).
- Generally collectible only if stipulated in writing and not unconscionable.
Moratory interest (interest as damages for delay)
- Imposed when the debtor is in default (delay), often triggered by demand or due date under the contract.
- Parties may stipulate a higher “default rate,” but courts may reduce it if oppressive.
Legal interest
- Interest set by jurisprudence/regulation for judgments and certain obligations when interest is due as a matter of law.
- A widely applied modern baseline in Philippine case law is 6% per annum in many contexts (especially for judgments and forbearance of money after key jurisprudential changes), though application depends on the nature of the obligation, timing, and whether the case involves loans/forbearance or damages.

4) What counts as “excessive” or “unconscionable” interest in Philippine practice

A. No single mathematical test

Philippine courts have repeatedly treated unconscionability as fact-sensitive. There is no universal statutory table that says “X% per month is always void.” Instead, courts assess whether the rate is:

Shocking to the conscience
Inequitable / iniquitous
Unconscionable
Oppressive and whether the borrower’s consent was meaningful.

B. Typical red flags courts look at

While not an official checklist, these factors tend to matter:

Monthly rates that balloon quickly Philippine decisions frequently scrutinize interest stated per month (e.g., 5%, 10%, 15% monthly), because when annualized these can become extreme.
Layered charges that function like hidden interest Lenders sometimes add:
- “Service fees”
- “Processing fees”
- “Administrative charges”
- “Collection fees”
- “Late payment charges”
- “Penalty interest” Courts may aggregate these and ask: What is the real effective rate? If the stack becomes punitive, it’s vulnerable.
Penalty interest + liquidated damages + attorney’s fees all at once A contract that imposes multiple heavy sanctions for the same default may be reduced for being punitive rather than compensatory.
Compounding that causes runaway debt “Interest on interest,” frequent capitalization, or compounding—especially without clear borrower understanding—can be attacked as unconscionable.
Borrower vulnerability / lack of bargaining power Courts are more likely to intervene where the borrower:
- was in urgent need,
- had no real ability to negotiate,
- signed a standard-form contract,
- is unsophisticated relative to the lender.
Gross mismatch versus market realities Evidence (even informal) that the lender’s rate is far beyond typical commercial lending, especially absent special risk reasons, supports unconscionability arguments.

C. Security and risk can matter, but they don’t justify anything

A lender may argue high interest is justified due to:

lack of collateral,
high default risk,
short-term “bridge” nature. Courts may consider these—but still reject rates that are effectively confiscatory.

5) How courts “fix” an excessive interest clause

When a court finds interest unconscionable, it does not always void the entire loan. Common outcomes include:

Reduction of the interest rate to a reasonable level The court may equitably reduce the stipulated rate.
Replacement with legal interest (often 6% per annum in many judgment/forbearance contexts) Sometimes courts treat the stipulated interest as void or unenforceable and apply legal interest instead—especially where the contract term is defective, unclear, not properly stipulated, or grossly oppressive.
Striking or reducing penalties and add-ons Courts can also reduce:
- penalty interest,
- liquidated damages,
- attorney’s fees (especially when unconscionable or not adequately justified).
Recomputation of the obligation Courts may order recomputation based on:
- principal,
- allowable interest,
- allowable penalties,
- payments made (properly credited).

6) Practical method: how to evaluate if a rate is “excessive” in a Philippine dispute

Step 1: Identify everything the borrower pays because of the loan

List all charges, not just “interest”:

stated interest rate,
default rate,
penalties,
fees deducted upfront,
monthly “service charges,”
collection fees,
attorney’s fees on default.

Step 2: Convert to an “effective” rate

Even a “low” nominal rate can become extreme if:

fees are deducted upfront (reducing cash received),
penalties accrue quickly,
compounding is frequent.

A borrower who “borrows” ₱100,000 but receives only ₱85,000 due to deductions is effectively paying a higher rate than what’s printed.

Step 3: Check compliance with written stipulation and disclosure

Ask:

Is the interest clause in writing and signed/acknowledged?
Are the terms clear, or buried/ambiguous?
Is there proper disclosure of finance charges where required?

Step 4: Contextual fairness review

Assess:

borrower bargaining power,
urgency and necessity,
lender sophistication,
presence/absence of collateral,
duration (short-term high rates can still be abusive),
total cost vs principal.

Step 5: Compare the remedy you want with the facts you can prove

Typical borrower arguments:

“No written stipulation—no conventional interest.”
“Rate and penalties are unconscionable; reduce to reasonable / legal interest.”
“Fees are disguised interest; compute effective rate; reduce.”
“Penalty + interest + fees constitute double recovery/punitive damages.”

Typical lender defenses:

“Borrower freely agreed; commercial risk; industry practice.”
“Charges are separate consideration/services.”
“Borrower is not unsophisticated; negotiated terms; repeated transactions.”

7) Common scenarios and how Philippine law tends to treat them

A. “Interest per month” loans (informal lending)

These are frequently litigated because:

the annualized rate looks extreme,
documentation is often weak,
penalties and compounding are common.

Vulnerability: courts often intervene where the borrower’s obligation rapidly becomes multiples of principal.

B. Loans with both high interest and harsh penalty clauses

Courts may:

reduce penalty interest,
reduce liquidated damages,
reduce attorney’s fees,
and sometimes reduce the base interest too.

C. Promissory notes and post-dated checks

If the transaction is structured around promissory notes and PDCs:

the debt remains civil in nature,
but litigation can become pressured. The enforceability of interest still turns on written stipulation and unconscionability. (Separate criminal issues may arise depending on facts, but “high interest” by itself is not automatically a crime.)

D. Credit arrangements with poor disclosure

Failure to comply with disclosure duties can weaken collection claims and expose the lender to regulatory/civil consequences. Even when principal is collectible, unclear or hidden charges are vulnerable.

8) Court interest computations in practice: what usually happens

Even when parties fight about rates, courts often end up doing a structured computation:

Determine principal actually received/owing
Add allowable conventional interest (if valid and not unconscionable) up to default
Add allowable moratory interest (if justified and not excessive) during delay
Add allowable legal interest on adjudged amounts (often from judgment finality, depending on doctrine)
Credit all payments properly (sometimes reclassified first to principal if interest is reduced)

Because of this, the “win” in excessive interest cases is often:

not wiping out the debt,
but cutting it down to a fair, legally supportable amount.

9) Drafting and compliance tips (for lenders and borrowers)

For lenders (to avoid unenforceability)

Put interest terms clearly in writing (rate, base, frequency, compounding).
Separate and justify fees; avoid stacking punitive add-ons.
Ensure proper disclosure of finance charges and effective costs.
Keep penalties reasonable and proportional to actual delay losses.

For borrowers (to preserve defenses)

Keep copies of all documents and receipts; track net proceeds received.
Compute the effective cost: deductions + penalties + compounding.
Preserve proof of bargaining circumstances (urgency, standard-form contract, lack of negotiation).
Challenge unclear clauses early; demand a written breakdown.

10) Quick reference: rules that frequently decide cases

No written interest stipulation → conventional interest generally not collectible.
Even with written stipulation → courts may reduce unconscionable rates/penalties.
Label does not control → fees and penalties can be treated as disguised interest.
Remedy is often reduction/recomputation, not total nullification of the loan.
Legal interest (often 6% per annum in many modern applications) frequently becomes the fallback or judgment interest standard, depending on timing and nature of obligation.

11) If you’re analyzing a real contract: a clean checklist

What amount was promised vs actually received (net proceeds)?
Exact written interest terms (rate, period, compounding).
Default/penalty provisions and whether multiple sanctions overlap.
All fees and deductions (are they tied to the loan or real services)?
Total obligation growth over time (does it become absurd quickly)?
Borrower’s bargaining context (standard-form? emergency? sophistication?).
Documentation quality (signed? readable? disclosed? consistent?).
What remedy is most defensible: reduce rate, strike penalties, apply legal interest, recompute.

If you want, paste the interest/penalty clauses (remove personal identifiers). I can walk through a Philippine-style unconscionability analysis and show how courts typically recompute the numbers (still as general information, not legal advice).