Excessive 15 % Compounded Loan Interest in the Philippines: A Comprehensive Legal Primer
(Updated as of 13 June 2025—Philippine jurisdiction)
1. Setting the Stage
Commercial lenders, “five–six” operators, and even a few formal financial‐technology platforms have begun quoting 15 % interest per month, compounded, on short-term consumer or SME loans. If compounded monthly, the effective annual rate (EAR) exceeds 540 %—far beyond anything economists would regard as rational compensation for credit risk. Is that lawful? Can a borrower challenge it in court? What relief has Philippine jurisprudence actually granted? This article organizes everything you need to know into one place.
2. The Statutory Landscape
| Law / Issuance | Key Take-away | Relevance to 15 % Compounded |
|---|---|---|
| Act No. 2655 (Usury Law, 1916) | Originally fixed ceilings (6 %-12 % p.a.). | Still exists but rate ceilings are “non-effective” after CB Circular 905. |
| Monetary Board (BSP) Circular No. 905 (Dec 22 1982) | “Suspended” Usury Law ceilings; lenders and borrowers free to stipulate rates. | No rate caps, but does not immunize unconscionable rates from judicial review. |
| Civil Code – Art. 1306 (autonomy of contracts); Art. 1229 & 2227 (judicial power to reduce penalties); Art. 1159, 1175 (interest presumed simple unless clearly stipulated). | Allows parties to stipulate, subject to law, morals, good customs, public order, public policy. | Basis for courts to strike down or pare back 15 % compound as “contrary to morals or public policy.” |
| RA 3765 (Truth in Lending Act) + BSP Reg. X306/SEM 2022-057 | Mandatory full disclosure of effective rate and compounding. | Non-disclosure of compounding converts agreement into simple interest plus administrative and criminal liability. |
| RA 9474 (Lending Company Regulation Act, 2007) + SEC Memo Circular 18-2019 | Licensing for lending companies; SEC may suspend / revoke for “unconscionable” rates or abusive collection. | Borrowers can lodge complaint with SEC; SEC has repeatedly shut down apps quoting ≥15 % monthly. |
| RA 11765 (Financial Products and Services Consumer Protection Act, 2022) | Empowers BSP & SEC to cap rates where consumer protection requires. | Door is open for future rate-cap rules (mirroring 2021 cap on credit-card interest at 2 %/month). |
Bottom line: There is no legislated numeric cap, but multiple statutes empower regulators and courts to curb excessive or deceptive interest structures, especially when compounded.
3. Compounded Interest in Philippine Law
- Not presumed – Under Art. 1959 of the Civil Code, interest cannot be “capitalized” (i.e., compounded) without an express written stipulation and after the interest has already fallen due.
- BSP-monitored banks rarely compound contractual interest on consumer loans; they compound only past-due interest as penalty. The 15 %-per-month strand is therefore identified mainly with informal or lightly regulated lenders.
- Compounding + Penalty – The Supreme Court consistently treats compounded interest layered with penalty or late-payment charges as duplicitous, triggering judicial modification.
4. Supreme Court Jurisprudence: Six Pillars
| Case | G.R. No. / Date | Ratio / Action Taken |
|---|---|---|
| Medel v. Court of Appeals | G.R. 131622, 27 Nov 1998 | 5.5 % per month simple cut to 12 % p.a. as “shocking conscience.” Recognized court’s power despite CB Circular 905. |
| Spouses Abella v. Abella | G.R. 217098, 14 Dec 2021 | 7 % monthly compounded voided; interest reset to 6 % p.a. and penalties deleted. |
| Nacar v. Gallery Frames | G.R. 189871, 13 Aug 2013 | Clarified shifting “legal interest” (12 %→6 % p.a.) and its purely simple character. |
| Spouses Toring v. Ganzon | G.R. 190706, 27 June 2018 | 4 % monthly + 6 % penalty held “unconscionable”; total reduced to legal interest. |
| Security Bank v. Spouses Bernal | G.R. 175330, 11 Mar 2020 | Court permitted interest escalation clause only if “not oppressive”; 24 % p.a. OK, but warned anything that doubles prevailing rates likely invalid. |
| Heirs of Malate v. Gamboa | G.R. 214016, 10 Jan 2023 | Compounded 3 % monthly interest invalidated for “double recovery.” Emphasized disclosure obligations under RA 3765. |
Observations
- Courts seldom allow >3 % per month simple; they never approve 15 % compounded.
- Even without explicit statutory caps, interest is struck down when it: a. grossly exceeds market, b. exploits debtor distress, or c. contradicts “good customs” (Art. 1306).
5. Tests of Unconscionability
Philippine courts borrow U.S. “shock-the-conscience” language but articulate local metrics:
- Rate Differential – Compare with BSP rediscount / 364-day Treasury bill or prevailing pawnshop rate for similar collateral. Anything >2-3× market is suspect.
- Bargaining Position – Debtor’s personal circumstances (necessitous, unlettered) weigh heavily.
- Transparency – Failure to itemize compounding frequency or EAR in the disclosure statement is per se unconscionable (RA 3765, Sec. 6).
- Collective Practices – Courts take judicial notice that 15 % monthly is typical of “loan-shark” schemes targeting wage earners and barangay micro-entrepreneurs.
6. Procedure to Challenge a 15 % Compound Loan
Negotiation & Demand Letter
- Cite Medel, Abella, Toring.
- Offer to pay principal plus legal interest (6 % p.a.).
Civil Action (Regional Trial Court, money claim)
Cause of Action: Annulment or reformation of loan contract plus accion pauliana if collateral already foreclosed.
Prayer:
- Nullify or reduce interest;
- Declare compounding void;
- Accounting and refund;
- Damages and attorney’s fees under Art. 2208.
Provisional Remedies
- Injunction to stop foreclosure/repossession.
- Consignation of uncontested amount (principal + 6 % p.a.) to show good faith.
Administrative Route
- SEC Complaint (if lender has Lending/FinTech license).
- BSP Financial Consumer Conciliation (for thrift / rural banks).
- Barangay conciliation may toll prescriptive period for small loans (< PHP 200 k).
Criminal Liability Technically the Usury Law still penalizes rates in excess of ceilings, but because the ceilings are suspended, criminal prosecution is rare. However, estafa (Art. 315 RPC) or grave coercion may lie where lender uses threats or “doxxing” tactics common to rogue online lending apps.
7. Defensive Moves Lenders Should Know
| Compliance Step | Why it Matters |
|---|---|
| Full Truth-in-Lending Disclosure (nominal, effective, compounding frequency) | Avoids per se invalidation; mitigates damages. |
| Reasonable Penalty Clause (≤ 2 % per month simple on amount due) | Supreme Court sustains ≤ 24 % p.a. penalty + nominal combined. |
| Escalation Clause Tied to a Benchmark | E.g., “may increase but shall not exceed 2× BSP overnight lending rate.” |
| Board Resolution Justifying Rate (for corporate lenders) | Evidence of due diligence; useful in SEC investigations. |
8. Interaction with Repossession & Foreclosure
- Real-estate mortgages: The Supreme Court (Abella, Malate) will still nullify interest post-foreclosure and order re-computation before confirmation of sale.
- Chattel mortgages: Excessive interest renders subsequent sale voidable, allowing debtor to redeem without the “usurious” component.
9. Cross-Border & FinTech Nuances
- Foreign Currency Loans – BSP Circular 1586-2024 requires simple interest unless expressly approved; compounding on USD loans to residents is disallowed.
- Digital Micro-Lending Apps – SEC has blacklisted 151 apps (2019-2025) for rates between 10-30 % monthly plus abusive collection.
- Peer-to-Peer Platforms – Under the 2023 Sandbox Framework, interest is capped at “market + 15 percentage points,” translating today to ≈33 % p.a. simple, no compounding permitted.
10. Effective Litigation Strategies
| Tool | Purpose | Case Support |
|---|---|---|
| Judicial Notice of Market Rates | Skip expensive expert testimony; ask court to take notice of BSP data. | Spouses Abella |
| Reductio ad Absurdum Computation | Show court how a ₱10,000 loan balloons to >₱1 Million in 3 years at 15 % compounded. | Medel invoked “shock the conscience” via math. |
| Art. 1363 Reformation | If parties truly intended 15 % simple but contract says “compounded,” ask court to reform. | Nacar reminds courts of equitable powers. |
| Partial Nullity Doctrine | Strike down only interest clause, preserve principal. | Toring; Security Bank. |
11. Key Take-Aways for Borrowers & Practitioners
15 % per month compounded will never survive judicial scrutiny.
No statutory cap ≠ no limit. The standard is reasonableness; courts and regulators wield broad equitable power.
Compound interest must be:
- Express (in writing, separate stipulation);
- Transparent (EAR disclosed); and
- Fair in light of prevailing rates—requirements seldom met in practice.
Relief spectrum: from contract reformation to complete nullification of interest, plus possible refund and damages.
Prompt action matters. Delay not only accrues interest but may constitute waiver or laches, especially if borrower continues paying for years without protest.
12. Checklist Before Filing a Case
- Gather loan contract, disclosure statement, receipts.
- Secure BSP/SEC certified “prevailing market rate” data.
- Compute EAR showing exponential growth.
- Draft demand letter invoking Civil Code Arts. 1306, 1229, and Medel line of cases.
- Prepare to tender uncontested principal + 6 % p.a. into court.
- Consider class complaint if lender services large pools of similarly situated borrowers (Rule 3, Sec. 12 AM No. 19-10-20-SC).
13. Conclusion
While the Philippine monetary authorities have liberalized interest-rate ceilings since 1982, judicial and regulatory safeguards remain robust. A 15 % monthly compounded charge is squarely at odds with public policy, consumer-protection statutes, and decades of Supreme Court teaching. Borrowers confronted with such terms possess a strong arsenal of statutory, equitable, and administrative remedies to void, reduce, or recover excessive charges—and the courts have shown consistent willingness to wield them. Lenders, for their part, ignore these principles at their peril.
This article is for informational purposes only and does not constitute legal advice. For case-specific guidance, consult Philippine counsel.