Unconscionable Interest, Penalty Clauses, Disclosure Duties, and How Complaints Work

1) Why this issue is common in online loans

Many online loan products—especially short-term “nano” or “cash-now” loans offered through apps—front-load costs (processing fees, “service” fees, convenience fees, collection fees) and then impose high default interest plus penalties that compound daily. Borrowers often focus on the cash received (“net proceeds”), while the contract computes charges on the “face amount,” producing an effective rate far above what the borrower expects.

In Philippine law, the key idea is this: high interest is not automatically illegal, but courts and regulators can intervene when charges become unconscionable, abusive, undisclosed, or imposed through unfair collection practices.

2) The basic legal landscape: no fixed interest ceiling, but not a free-for-all

a) The Usury Law still exists, but ceilings were suspended

The old interest ceilings under the Usury Law were effectively lifted when the monetary authority (then Central Bank; now BSP) issued CB Circular No. 905 (1982), which suspended interest rate ceilings. As a result:

Parties may generally agree on interest rates.
But courts may still strike down or reduce interest that is “unconscionable”.
“Freedom to contract” in the Civil Code is limited by law, morals, good customs, public order, and public policy.

b) Courts still police unconscionable interest

Even without a statutory ceiling, the Supreme Court has repeatedly held that interest rates that are iniquitous or unconscionable may be equitably reduced. A frequently cited example is Medel v. Court of Appeals (1998), where an extremely high monthly rate was reduced for being unconscionable. Another oft-cited case is Solangon v. Salazar (2001), also reducing a very high monthly interest rate. The specific “safe” rate is not fixed; courts look at circumstances, bargaining position, disclosure, and proportionality.

c) “Legal interest” rules (when no valid rate applies, or after reduction)

When interest is not properly agreed upon, or when a court reduces an unconscionable rate, courts often apply legal interest:

12% per annum historically applied to loans/forbearance prior to July 1, 2013 (per prevailing jurisprudential guidelines at the time).
6% per annum generally applies from July 1, 2013 onward, following BSP-MB Circular No. 799 (2013) and Supreme Court guidance (commonly associated with Nacar v. Gallery Frames (2013)).

This matters in online-loan disputes because courts sometimes:

enforce principal,
strike/reduce contractual interest, and
replace it with legal interest.

3) Interest vs. penalties vs. fees: different rules apply

Online-loan disputes often involve three buckets of charges:

a) Interest (compensation for use of money)

Key Civil Code rule: Article 1956 — No interest shall be due unless it has been expressly stipulated in writing.

If the lender cannot prove a written stipulation of interest, the borrower may be liable only for the principal (plus possibly damages in proper cases), not contractual interest.
In the online context, “writing” can include electronic contracts and clickwrap agreements, because the E-Commerce Act (RA 8792) recognizes the legal effect of electronic data messages and electronic documents. The lender still bears the burden of proving actual assent and the terms agreed to.

b) Penalty charges / penalty clauses (liquidated damages for breach)

Penalties are governed mainly by Civil Code provisions on obligations and contracts. The crucial rule is:

Article 1229 — Courts may equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or when the penalty is iniquitous or unconscionable.

So even if a borrower agreed to a penalty, courts can cut it down if it becomes oppressive (e.g., a daily penalty that rapidly exceeds principal, on top of high default interest).

c) Fees (processing fees, service fees, collection fees, add-ons)

Fees are not automatically invalid, but they are frequently attacked on these grounds:

Non-disclosure / misleading disclosure (especially when the borrower receives far less than the “loan amount”).
Disguised interest (fees functioning as interest to inflate the effective rate).
Unfair or unreasonable charges, especially when triggered by default (collection fees, attorney’s fees, “field visit” fees) without basis, proof, or proportionality.

Courts and regulators look at substance over labels—calling something a “service fee” does not prevent it from being treated as part of the cost of credit.

4) “Unconscionable” in practice: what triggers reduction or invalidation

Philippine decisions do not set a single numeric threshold. Instead, common red flags include:

Extremely high monthly or daily rates (especially when annualized, they become shocking).
Stacking: regular interest + default interest + penalty + multiple fees.
Acceleration: declaring the full amount due immediately, then charging default interest/penalties on the entire accelerated balance.
Non-negotiated, take-it-or-leave-it terms, especially for vulnerable consumers (contracts of adhesion).
Opaque disclosure: borrower thinks the loan is ₱10,000 but receives ₱6,000 net, yet charges are computed as if ₱10,000 was received.
Collection harassment and coercive tactics that suggest the borrower did not enter a fair, voluntary transaction environment.

Courts typically respond by:

enforcing principal,
reducing interest to a reasonable rate (often legal interest), and/or
reducing penalties under Article 1229.

5) Disclosure duties: Truth in Lending principles applied to online lending

The Philippines has a Truth in Lending Act (RA 3765). In essence, it aims to ensure borrowers are informed of the true cost of credit, commonly through disclosure of:

finance charges,
the effective interest rate (or equivalent measure),
amounts financed, and
other key terms.

For online lenders, the compliance risk often lies in:

burying charges in fine print,
using confusing screens,
failing to present a clear “total cost of credit” before acceptance, or
not making the borrower’s “net proceeds” and “total repayment” unmistakable.

A lender that cannot prove meaningful disclosure and assent is exposed to enforcement and litigation risk, and may find its charges reduced or disregarded.

6) Regulatory oversight: who supervises online lenders

Not all lenders are regulated the same way.

a) BSP-supervised institutions (banks, certain non-bank financial institutions)

If the lender is BSP-supervised, complaints may be directed to BSP consumer channels and internal dispute mechanisms.

b) SEC-registered Lending Companies and Financing Companies

Many online lending apps are operated by entities registered under:

Lending Company Regulation Act of 2007 (RA 9474), and/or
Financing Company Act (RA 8556).

These are primarily under SEC regulation. SEC has also issued rules and advisories targeting abusive practices by online lending platforms, particularly around registration, disclosure, and prohibited collection conduct.

c) Unregistered or offshore / shell operators

A significant portion of abusive app-lending complaints involve entities that are:

not properly registered,
using layered corporate structures, or
operating through intermediaries.

This shifts the case from a purely civil dispute into a mix of regulatory enforcement, data privacy, and potentially criminal complaint territory depending on conduct.

7) Collection abuse and “shaming”: when it becomes legally actionable

Many online lending complaints in the Philippines involve collection methods such as:

contacting the borrower’s phonebook/contacts,
blasting messages to coworkers/family,
threats of arrest for mere nonpayment,
publishing accusations,
using profanity or harassment.

These practices can implicate:

a) Data Privacy Act (RA 10173)

If the app accessed contacts/photos/messages beyond what is necessary, or processed personal data without valid basis/consent, the borrower may have grounds for:

a complaint with the National Privacy Commission (NPC), and/or
related civil claims for damages.

Consent obtained through coerced, unclear, or bundled permissions is often contested, especially where access to sensitive data is not necessary for lending.

b) Civil Code tort and damages

Harassment and humiliation can support claims under:

abuse of rights principles, and
damages provisions (moral and exemplary damages in appropriate cases), depending on proof and severity.

c) Criminal law (case-dependent)

Threats, coercion, libel/defamation-type behavior, identity misuse, or extortionate conduct may trigger criminal complaints, but nonpayment of debt by itself is not a crime. “Threatening arrest” for a purely civil debt is a major red flag.

8) Litigation posture: how excessive charges are challenged in court

a) Common borrower defenses in collection cases

When sued for collection (or when disputing the balance), borrowers often argue:

No valid written stipulation of interest (Article 1956), or defective proof of assent in electronic contracting.
Unconscionable interest (equitable reduction).
Unconscionable penalty (Article 1229 reduction).
Fees are disguised interest or were not properly disclosed.
Payments misapplied (e.g., applied to penalties first to keep principal high).
Violation of disclosure rules (Truth in Lending principles).
Harassment/data privacy violations supporting counterclaims for damages.

b) What courts often do with computations

A common judicial “cleanup” looks like this:

Determine principal actually received (or principal as proven by evidence).
Assess whether contractual interest is validly agreed and not unconscionable.
If unconscionable: reduce to reasonable or legal interest.
Reduce penalty charges to a reasonable amount (or remove oppressive components).
Compute interest from applicable periods, and apply payments properly.

This is why documentation matters: borrowers should preserve proof of net proceeds received, payment receipts, and app screens/terms at the time of contracting.

9) Complaint pathways in the Philippines: choosing the right forum

A borrower facing excessive interest/penalties and abusive collection usually chooses among (or combines) these routes:

a) SEC (for lending/financing companies and many online lending platforms)

Best for:

complaints about registration, unfair terms, prohibited collection practices, and regulatory violations by lending/financing companies and their platforms.

b) BSP (if the lender is BSP-supervised)

Best for:

consumer complaints about BSP-regulated institutions, including dispute resolution expectations.

c) National Privacy Commission (NPC)

Best for:

contact harvesting, disclosure to third parties, unlawful processing, or data breaches involving borrower and contacts.

d) Courts (civil actions / defenses)

Best for:

definitive adjudication of how much is actually owed, reduction of interest/penalties, damages, injunctions in proper cases.

e) Law enforcement / DOJ (case-dependent)

Best for:

coercion, threats, extortion-like tactics, identity misuse, or other conduct beyond civil collection.

A practical reality: many borrowers pursue regulatory + privacy complaints to stop abusive behavior, while the civil amount is later threshed out in negotiation or court.

10) Evidence checklist: what usually decides these cases

Because online lending is screen-and-click driven, disputes often turn on records. The most important are:

Screenshot/video capture of loan offer screens showing: loan amount, net proceeds, fees, repayment schedule, penalties, and total payable.
Copy of the Terms and Conditions and privacy notice as shown at acceptance time.
App permission logs (what access was requested: contacts, SMS, photos).
Proof of disbursement (e-wallet/bank transfer showing net received).
Payment receipts / transaction history.
Collection messages/call logs; posts or blasts to contacts; threats.

Lenders typically present:

system logs of assent,
e-contract records,
amortization/ledger,
notices of default.

Courts weigh credibility, completeness, and whether the disclosures were truly presented pre-contract.

11) Practical standards that shape outcomes (even without a statutory cap)

Even in the absence of a fixed interest ceiling, the combined framework produces predictable constraints:

No written/electronic proof of interest agreement → interest may be denied (Article 1956).
Oppressive interest → reduced (equity and jurisprudence).
Oppressive penalty → reduced (Article 1229).
Undisclosed or misleading cost of credit → regulatory exposure and weakened enforceability.
Abusive collection and privacy violations → separate liability beyond the debt.

12) Key takeaways for Philippine online-loan disputes

High interest is not automatically illegal in the Philippines after CB Circular 905, but courts will not enforce unconscionable rates.
Penalty clauses are especially vulnerable to reduction under Article 1229 when they become iniquitous.
Disclosure and provable assent are central in online lending; electronic contracts can qualify as “writing,” but proof matters.
Data-driven harassment (contacts blasting, shaming) can create privacy and damages liability separate from the loan balance.
Complaints commonly involve SEC (lending/financing companies), BSP (BSP-supervised lenders), and NPC (data privacy), alongside civil court remedies for recalculating the debt.