Excessive Collection Fees on Personal Loans in the Philippines

A comprehensive legal overview (as of June 2025)

1. Introduction

“Collection fees” (sometimes called “penalty charges,” “late-payment charges” or “collection costs”) are amounts a lender tacks on when a borrower fails to pay a personal-loan installment on time. Because the Philippine Usury Law ceilings have long been lifted, lenders often assume they can impose any rate they please. They cannot. Both statute and jurisprudence police “excessive or unconscionable” charges, and regulators now treat abusive fee structures as a consumer-protection breach.

2. Key Statutes & Regulations

Source	Core rule on fees	Notes & sanctions
Civil Code – Arts. 1229, 1306, 1409	Courts may reduce or strike down stipulations “contrary to morals, good customs or public policy.”	Invoked by SC to void 3% – 5% per month penalty interest (e.g., Medel v. CA, G.R. 131622, 27 Nov 1998).
Truth in Lending Act (RA 3765) & BSP Regs.	Lenders must disclose “finance charge” (all interest, fees & penalties); hidden or misleading charges may be nullified.	Criminal fine + up to 1 year jail for willful violation.
Consumer Act (RA 7394)	Unfair or unconscionable sales acts include “exorbitant credit charges.”	DTI may issue cease-and-desist, administrative fines, or file criminal action.
Lending Company Regulation Act (RA 9474 + IRR)	Lending/financing cos. must keep fees “reasonable.” SEC can suspend or revoke license, impose ₱10 000–₱50 000 per count, or criminally prosecute officers.
Financial Consumer Protection Act (RA 11765, 2022)	Declares imposition of excessive or unreasonable interest, fees or charges an “abusive conduct.”	BSP/SEC/IC may order restitution, disgorgement, fines up to ₱2 million per transaction plus daily penalties, or suspension of executives.
BSP Circular 1098 (2020) & 1165 (2023)	Caps credit-card finance charges (2%/mo interest; 1%/mo late-payment fee) & bans other hidden penalties. While not directly covering personal loans, it signals the “reasonableness” benchmark courts now cite.
SEC Memorandum Circular 18-2019 & 03-2022	Bans harassment & “exorbitant service or collection fees” by online lending apps; mandatory disclosure of exact peso amounts in marketing.
Data Privacy Act (RA 10173) & NPC Circular 20-01	“Debt-shaming” or unnecessary disclosure of default to a borrower’s contacts is punishable up to ₱5 million plus imprisonment.

3. Supreme Court Jurisprudence on “Excessive” Charges

Case	Holding on Fees
Medel v. CA (1998)	5% per month penalty + 12% per annum interest void for unconscionability; court reduced penalty to 2%/mo.
Spouses Abella v. Abapo (2018)	7%/mo penalty + compounding interest “shocks the conscience”; reduced to 6% per annum from judicial demand.
Spouses Castro v. Tan (2016)	3%/mo penalty sustainable only if total effective rate doesn’t exceed ~24% p.a.; otherwise annulled.
Spouses David v. Tiongson (2022)	Reiterated power to strike down both penalty and regular interest when total burden exceeds double the principal within 2 years.
Nacar v. Gallery Frames (2013, guidelines)	When interest stipulation is void, courts substitute 6% per annum legal interest (now 6% under BSP MB Res. 739-2022).

Key judicial tests

Total burden vs. principal. If fees + interest could double the loan within a short horizon, courts infer unconscionability.
Industry comparables. Courts look at BSP ceilings for credit-cards as proxy.
Borrower sophistication. Fees against low-income/unsophisticated borrowers face stricter scrutiny.

4. How “Collection Fees” Are Structured

Fixed peso amount (e.g., ₱500 per missed installment).
Percentage of overdue amount (e.g., 5% of installment).
Per-diem penalty (e.g., ₱300/day after due date).
Attorney’s fees / collection cost clauses (often 25% of total outstanding).

Warning: The Supreme Court repeatedly slashes contractual attorney’s-fee clauses above 10% unless the lender proves it actually spent that much in litigation.

5. Regulatory Benchmarks on “Reasonableness”

Regulator	Guidance figure	Practical effect
BSP-CC ceiling	Late-payment fee ≤ 1% of outstanding balance per month	Courts widely analogize this to personal loans.
SEC Online Lending MC 18-2019	Total effective interest + fees “should not exceed 33% of principal per annum” for short-tenor apps.	Not formally binding on banks but persuasive.
Pawnshop cap (BSP Cir 1107-2021)	Storage fee + penalty interest combined ≤ 2%/mo of principal.	Illustrates “small-ticket” ceiling logic.

6. Borrower Remedies

Negotiation / restructuring with lender (BSP FCP Act requires “fair and timely handling of complaints”).
Regulator complaint
- BSP Consumer Assistance Mechanism (banks, e-money issuers)
- SEC Financing & Lending Division (non-banks, online apps)
- NPC for privacy breaches
- DTI Fair-Trade Enforcement for abusive sales tactics
Civil suit to annul or reduce fees; courts can:
- Declare the fee clause VOID and apply 6% legal interest;
- Apply Art. 1229 to reduce penalty “to a reasonable amount”;
- Award moral & exemplary damages plus attorney’s fees if lender acted in bad faith.
Class or representative suits (Rule 3 Sec. 12, 1997/2020 Rules of Court) for large user bases harmed by the same fee schedule.

7. Lender Compliance Checklist

✔ Transparent disclosure – total peso cost, effective interest rate (EIR), and separate line item for every fee.
✔ Cap late-payment fee at or below 1%/mo of overdue amount; avoid per-day pesos that outstrip this.
✔ Attorney’s-fee clause ≤ 10% of amount due; collectable only when suit is filed and expenses proven.
✔ No automatic “collection fee” upon default that duplicates late-payment charge.
✔ Policies on harassment and data sharing aligned with SEC MC 18-2019 and NPC Circular 20-01.
✔ Periodic board review of fee matrix vs. market benchmarks & jurisprudence.

8. Emerging Issues (2024 – 2025)

Digital-collection outsourcing. Third-party servicers must register with SEC and follow the same fee/harassment rules.
Buy-Now-Pay-Later (BNPL). BSP consultative paper (Feb 2025) proposes an overall cost cap of 30% p.a., including all fees.
Algorithmic pricing. RA 11765 empowers BSP to examine AI-driven lending models for discriminatory or opaque penalty structures.
Cross-border fintechs. SEC now requires foreign-incorporated loan apps to establish a local representative office before offering credit to Philippine residents—fees charged offshore are still subject to local “reasonableness” review.

9. Practical Tips for Borrowers

Ask for the EIR sheet—lenders must hand it over before you sign.
Keep all payment proofs; dispute charges in writing within 15 days.
Invoke RA 11765 when complaining; cite “abusive conduct” to trigger regulator action.
If already sued, plead unconscionability and present jurisprudence; courts regularly slash fees.

10. Conclusion

While the Usury Law caps are gone, the Philippines has not adopted a free-for-all approach. Statutes, circulars and a strong line of Supreme Court cases arm borrowers—and regulators—with ample tools to strike down or pare back excessive collection fees on personal loans. Lenders that ignore these guideposts face reputational damage, regulator fines, and the very real prospect that courts will rewrite their contracts for them.

Prepared June 20, 2025. This article is for general information; consult counsel for specific cases.