I. Introduction

In the Philippines, it’s very common for individuals to lend money to relatives, friends, co-workers, or even neighbors—sometimes “pang-abot,” sometimes as a side business. A frequent practical question is:

If I am a small private lender charging 5% interest, do I need to register a lending business with the government?

The short answer:

The interest rate (5%) by itself does not determine whether you must register.
What matters is whether you are “engaged in the business” of lending to the public.
Occasional private loans usually do not require registration as a lending company, but habitual, profit-oriented lending to various borrowers does trigger regulatory and tax obligations.

This article explains the legal framework, the difference between casual private lending and a lending business, and the implications of charging 5% interest.

II. Legal Framework Governing Lending in the Philippines

1. The Usury Law and the “No Interest Ceiling” Regime

Historically, the Usury Law (Act No. 2655) imposed statutory caps on interest. However, by virtue of Central Bank (now BSP) Circular No. 905 (1982), the ceilings on interest rates were effectively lifted. In practical terms:

There is currently no fixed statutory maximum interest rate in the Philippines.
Parties are generally free to agree on the interest rate in a loan contract.
However, courts can still strike down “unconscionable” or “excessive” interest as contrary to morals, good customs, public policy, or equity.

So the law does not say: “At 5% interest, you must register as a lending business.” Instead, the law looks at:

Freedom to contract, and
Reasonableness of the agreed rate (reviewed by courts when challenged).

2. Civil Code: Requirements for Interest

Key Civil Code concepts:

Article 1956: No interest shall be due unless it has been expressly stipulated in writing.
- If you lend money verbally and agree to 5% interest but do not put it in writing, you cannot legally demand contractual interest—only the legal interest may potentially apply after default.
Legal interest rate: By jurisprudence and BSP issuances, the legal interest rate is 6% per annum for monetary obligations. Courts may apply this rate when:
- There is no valid written stipulation of interest, or
- Contractual interest or penalty is voided/reduced as unconscionable.

So if you charge 5% (per year) and properly document it in writing, that rate is generally acceptable and below the usual benchmark thresholds that courts have considered unconscionable in past cases.

3. Lending Company Regulation Act (R.A. No. 9474)

Republic Act No. 9474 (Lending Company Regulation Act of 2007) is the primary law regulating lending companies, enforced by the Securities and Exchange Commission (SEC).

Key points:

A “lending company” is basically a corporation engaged in granting loans from its own capital, or from funds sourced from not more than a limited number of lenders (traditionally “not more than 19 persons”), as its primary business.
Only corporations may operate as lending companies under this law. Sole proprietorships and partnerships operating as “lending investors” are essentially required to incorporate and secure a lending company authority from the SEC.
There are minimum paid-up capital requirements (amount depends on regulations) and ongoing compliance duties:
- SEC registration as a corporation,
- Specific “Lending Company” primary purpose in the Articles of Incorporation,
- SEC Certificate of Authority to operate as a lending company,
- Regular reporting and compliance with anti-money laundering, record-keeping, and other rules.

Important: R.A. 9474 targets entities in the business of lending to the public, not one-off private lenders engaged in isolated or occasional loans.

4. Financing Companies and Banks

For completeness:

Financing companies are governed by R.A. 8556, also under SEC, but usually deal with financing of purchases (e.g., vehicle financing, equipment finance) and not just plain cash lending.
Banks and quasi-banks are regulated by the Bangko Sentral ng Pilipinas (BSP) under the New Central Bank Act and other banking laws.

A small private lender who merely lends personal funds is usually not a bank, quasi-bank, or financing company.

5. Local Government and Tax Regulations

Even if you are not a SEC-registered lending company, you may still be considered as “doing business” for other legal purposes, triggering:

DTI registration (for a sole proprietorship business name),
Mayor’s/business permit from the Local Government Unit (LGU),
BIR registration:
- BIR Form 1901/1903 (depending on structure),
- Issuing official receipts (ORs) if you represent that you’re doing business,
- Paying income tax on the interest income,
- Potentially percentage tax or other business taxes (depending on classification and thresholds).

III. When is Someone “Engaged in the Lending Business”?

The central practical issue is: Are you just lending, or are you in the business of lending?

Philippine law and practice look at habituality, regularity, and profit motive, not merely at the interest rate.

1. Indicators That You Are Not in the Lending Business

Typically NOT a regulated lending business if:

You only occasionally lend money to:
- family,
- friends,
- co-workers, or
- a very small circle of people;
The lending is incidental to your personal relations, and not advertised to the public;
You are not holding yourself out as a lender;
You do not treat lending as a regular livelihood or line of business (no signage, no marketing, no systematic operation).

In these cases, the law usually treats this as personal private lending. You:

Don’t need to register as a lending company with the SEC.
Still have to comply with Civil Code rules (written stipulation of interest, good faith, no unconscionable terms).
Still technically have to declare the interest income for tax purposes.

2. Indicators That You Are in the Business of Lending

You are more likely considered to be engaged in a lending business if:

You regularly and habitually lend money to multiple people for profit;
Lending is your primary or significant source of income;
You actively invite borrowers (e.g., “5% per month, pwedeng utang, text me”),
You advertise, post online, put up a sign, or rely on referrals with known lending terms;
You maintain systems: records of loans, scheduled collections, field collectors, etc.

In such cases, legally speaking, you are operating a lending business. To be fully compliant:

If you want to operate in accordance with R.A. 9474 and SEC regulations, you should incorporate as a lending company and obtain the required Certificate of Authority.
Operating as a habitual lender to the public without complying with the law can expose you to:
- SEC enforcement actions (fines, cease and desist),
- Possible criminal liability under R.A. 9474,
- Local government sanctions (no mayor’s permit),
- Tax issues.

IV. Does Charging 5% Interest Change Anything?

The short answer: No, not by itself.

The 5% figure may refer to:

5% per annum (per year)
- This is generally moderate and well within what courts consider reasonable.
- It is even below the default legal interest of 6% per annum applied by courts in many monetary cases.
- From a regulatory standpoint, charging 5% per year does not trigger any special licensing requirement on its own.
5% per month (equivalent to ~60% per annum, assuming simple interest)
- This is common in informal “5-6” or small-money lending.
- Legally, it is still possible to contract for this rate under the no-ceiling regime, but:
  - Courts may consider it unconscionable depending on circumstances (especially for long-term loans or vulnerable borrowers).
  - Courts may reduce the interest or declare it void and apply legal interest instead.
- Still, what triggers registration is the nature and scale of your activity, not the rate alone.

So 5% interest, whether per month or per year:

Does not automatically require registration as a lending company.
Is only part of the equation when courts evaluate fairness and enforceability.

V. Registration Requirements for Different Types of Lenders

1. Casual Private Lender (Individual)

Example: You lend ₱50,000 to a friend, payable in one year at 5% per year, just once or very rarely.

SEC Lending Company Registration:
- Not required, because you are not a corporation and not engaged in lending as a regular business to the public.
DTI / Mayor’s Permit:
- Usually not required for a one-off private loan.
BIR / Tax:
- Technically, the 5% interest income is taxable as part of your gross income.
- In practice, many small casual lenders do not report this, but the legal rule is that all income is taxable unless exempt.

Key compliance points:

Put the loan and interest in writing, signed by both parties.
Include clear terms: principal, interest rate, payment schedule, penalties.
Avoid unconscionable interest and penalty charges.
Consider documentary stamp tax (DST) obligations if the loan is formally documented at certain thresholds.

2. Small Regular Lender (Individual, “Side Line”)

Example: You regularly lend ₱5,000–₱20,000 to neighbors and co-workers, charging 5% per month, with more than a few borrowers at any given time. You collect weekly or monthly as a consistent side income.

Substance: You are effectively engaged in lending as a business.
Legal tension:
- R.A. 9474 contemplates that lending to the public as a business should be done by corporations registered as lending companies.
- In reality, many such lenders operate informally as individuals, without SEC registration or incorporation.

From a strict legal compliance perspective:

The “proper” route is to:
- Incorporate a company with lending as its primary purpose,
- Register with the SEC as a lending company and secure a Certificate of Authority,
- Secure mayor’s permits, BIR registration, and comply with tax obligations.

From a practical reality perspective:

Many small “5-6” style lenders remain unregistered and informal, which:
- Does not automatically void their loan contracts—they can still sue to collect, subject to defenses like unconscionable interest,
- But exposes them to regulatory and tax risks.

3. Formal Corporate Lending Company

Example: You want to operate a legitimate micro-lending business to employees, sari-sari store owners, or small entrepreneurs.

You must:

Incorporate under the Corporation Code (Revised Corporation Code):
- Name, primary purpose: lending or credit services;
Apply with SEC for a:
- Certificate of Incorporation, and
- Certificate of Authority as a lending company under R.A. 9474;
Comply with:
- Minimum paid-up capital,
- Board and officer requirements,
- Reportorial requirements (e.g., audited financial statements, General Information Sheet),
- Anti-money laundering regulations (if applicable),
- SEC rules on disclosure and consumer protection;
Obtain:
- Mayor’s permit (business permit),
- BIR registration, issue ORs, and pay appropriate taxes.

In this setup, your interest rate (even if 5% per month) is regulated primarily by contract and consumer protection rules, not by a statutory cap, but you are under close regulatory oversight.

VI. Effect of Non-Registration on Loan Enforceability

A common concern is:

If I’m not registered as a lending business, are my loans invalid?

Key points:

Loan contracts are generally valid if:
- Parties have legal capacity,
- The object (money) and cause (loan) are lawful,
- Essential terms (amount, borrower, repayment) are clear.
Regulatory violations (e.g., operating a lending business without SEC authority) do not automatically void the loan, but they can:
- Result in administrative and criminal penalties against the lender;
- Encourage courts to scrutinize and possibly reduce interest and penalty rates;
- Undermine the lender’s position if the borrower raises issues related to illegality or public policy.
For casual private lenders, non-registration is usually a non-issue, because they’re not within the scope of R.A. 9474 as long as they are not truly “in the business” of lending to the public.

VII. Practical Compliance Guide for Small Private Lenders

If you are a small private lender charging 5% interest, here is a practical checklist:

A. If You Are Only Lending Occasionally

No SEC lending company registration needed, provided you are not in the business of lending.
Do:
- Put the loan and interest in written form (promissory note or loan agreement).
- Clearly state the 5% interest and whether it is per annum or per month.
- Use reasonable penalties; avoid stacking multiple high charges (interest, penalties, service fees) that could be seen as abusive.
- Keep basic records of what has been paid.
- Consider declaring the interest as part of your taxable income.

B. If You Are Lending Regularly as a Source of Income

Ask yourself seriously:
- How many borrowers do I have?
- Am I doing this month after month?
- Am I advertising or openly offering to lend to anyone who asks?

If yes, you are closer to a lending business than casual lending. For full legal compliance:

Consider incorporating and registering as a lending company under R.A. 9474, or
At least register as a business (DTI, mayor’s permit, BIR) and then consult counsel on SEC implications.

Even if you decide to stay informal, be aware of:

Regulatory risk (especially if you scale up or attract complaints),
Tax risk (unreported interest income),
Civil risk (possibility of courts reducing your interest and penalties if challenged).

VIII. Summary and Conclusion

Core question:

Do small private lenders charging 5% interest need to register a lending business in the Philippines?

In essence:

Interest rate alone (5%) does not trigger registration.
- The law does not say: “At 5%, you must register.” Instead, it focuses on whether you are engaged in the business of lending to the public.
Occasional, private loans—even with 5% interest:
- Usually do not require registration as a lending company with the SEC;
- Still must follow Civil Code rules (interest in writing, no unconscionable terms);
- The lender should still recognize that interest income is taxable.
If you habitually lend money to multiple borrowers for profit, especially if you hold yourself out as a lender:
- Legally, you are in the lending business;
- To be fully compliant, you should:
  - Incorporate and secure a Certificate of Authority as a lending company under R.A. 9474, and
  - Obtain local permits and BIR registration;
- Operating without such compliance can lead to regulatory, tax, and legal risks, even if your rate is “only” 5%.
Courts can review and reduce excessive or unconscionable interest, regardless of registration status.

This discussion is an overview of the legal landscape based on general principles. Application to a specific situation (e.g., your number of borrowers, rate structure, collection methods, and documents) can change the analysis. For concrete business plans or significant lending activity, it’s wise to consult a Philippine lawyer or compliance professional to review your exact setup and documents.