EXCESSIVE INTEREST CHARGES IN ONLINE LOANS A Philippine Legal Perspective (2025)
1 | Overview
Online lending applications (“OLAs”) exploded in the Philippines after 2016, offering fast, unsecured, small-ticket loans disbursed through e-wallets or bank transfers—often within minutes. Speed came at a cost: effective interest and penalty rates routinely exceeded 360 % p.a., and aggressive collection practices abounded. This article surveys all the relevant Philippine law—constitutional, statutory, regulatory, and jurisprudential—together with enforcement trends and practical remedies available to borrowers who face excessive or “unconscionable” interest.
2 | The Legal Bedrock
| Source | Key Rule on Interest | Relevance to Online Loans |
|---|---|---|
| Civil Code, Art. 1956 & 1960 | Interest is not due unless expressly stipulated and must be in writing; compensation beyond the principal may be reduced if “unconscionable.” | Governs every loan contract, including those formed in-app. |
| Usury Law (Act No. 2655, as amended) | Sets ceilings but Central Bank Circular 905-82 (1982) lifted the ceilings, leaving rates to market forces, subject only to the Civil Code’s unconscionability doctrine. | OLAs rely on this “deregulated” environment to set triple-digit rates. |
| RA 3765 (Truth in Lending Act, 1963) | Lenders must disclose total finance charge, APR, and all other costs prior to consummation. Implemented by BSP/SEC TILA Regs. | Non-disclosure of a true APR is a common violation by OLAs. |
| RA 9474 (Lending Company Regulation Act, 2007) + SEC Rules | Lending companies (including online) must be SEC-licensed; Sec. 12 penalizes unlicensed lending with up to ₱2 M fine and 5 years imprisonment. | Many rogue OLAs lack or lose a licence. |
| RA 10641 & BSP Charter (RA 7653; RA 11211) | Empower BSP to set interest ceilings for specific consumer products. Current caps: credit cards = 24 % p.a. finance charge; cash advances fee = 1 %/month. | Though not directly binding on non-bank OLAs, courts draw persuasive guidance from BSP-imposed rates when judging unconscionability. |
| RA 11765 (Financial Products & Services Consumer Protection Act, 2022) | Expands BSP, SEC & IC supervisory and penal powers; expressly allows them to suspend or prohibit products with “abusive interest.” | Legal basis for SEC’s ongoing OLA clean-up campaign. |
| Data Privacy Act (2012) & NPC Circular 20-01 | Collections cannot access a borrower’s contacts, photos, etc. without freely-given consent; harassment and “doxxing” trigger fines up to ₱5 M & imprisonment. | Excessive-rate loan + privacy abuse = twin liability. |
| Cybercrime Prevention Act (2012) | Online libel, threats, and intimidation by collectors are separate felonies. | |
| Philippine Competition Act (2015) | Collusive fixing of high rates among platforms may invite PCC action. |
3 | Unconscionability Doctrine in Action
Because formal usury ceilings were suspended in 1982, judicial control shifted to equity. The Supreme Court routinely strikes down rates it deems “shocking to the conscience” and resets them to legal or “reasonable” levels (usually 12 % or 6 % p.a.).
| Case | Rate Challenged | Ruling |
|---|---|---|
| Medel v. Court of Appeals, G.R. 131622 (Nov 27 1998) | 5.5 % per month (66 % p.a.) | Reduced to 12 % p.a.; Court called the agreed rate “iniquitous and unconscionable.” |
| Castro v. Tan, G.R. 168940 (Aug 31 2006) | 7 % per month | Nullified; new rate 12 % p.a. |
| Spouses Abella v. Spouses Abella, G.R. 164548 (Jan 21 2015) | 6 % per month + penalties | Cut to 12 % p.a.; reiterated that freedom to contract ends when stipulation becomes oppressive. |
| Nacar v. Gallery Frames, G.R. 189871 (Aug 13 2013) | Clarified that 6 % p.a. (current legal interest) applies when Court re-computes. |
Lower courts have applied the same reasoning to 1 %–2 % per day OLA rates, treating them as void and replacing them with the prevailing legal rate from default until full payment.
4 | Regulatory Offensive Against Abusive OLAs
SEC Memorandum Circular No. 18-2019 (FinTech Advisory) Prohibits “unreasonable” interest, hidden fees, and use of borrower phone contacts for harassment; violations lead to licence revocation.
SEC MC 3-2022 – Cap on Small-Value Short-Term Consumer Loans Ceilings: • Nominal interest: 6 % per month (≈ 0.2 %/day) • Default interest/penalty: No more than 15 % of principal once (not per month)
Name-and-Shame & App Delisting SEC regularly publishes blacklists; the National Privacy Commission (NPC) and Department of Information and Communications Technology (DICT) coordinate with Google/Apple to remove erring apps.
SIM Registration Act (2022) – makes it easier to trace anonymous lenders and collectors.
5 | Civil, Administrative & Criminal Exposure of Lenders
| Violation | Forum | Possible Sanctions |
|---|---|---|
| Excessive interest (void stipulation) | Trial Courts | Interest re-computed to 6 % p.a.; lender may be made to refund over-collections. |
| Non-disclosure (RA 3765) | BSP/SEC | ₱5k – ₱50k per violation + suspension; criminal liability for officers up to 1 year imprisonment. |
| Operating without SEC licence (RA 9474) | SEC; DOJ | ₱10k–₱2 M fine + 5 years jail; directors/officers personally liable. |
| Privacy harassment (NPC) | NPC; DOJ Cybercrime | Cease-and-desist orders, ₱2 M-₱5 M fines, imprisonment (3-6 years for grave threats/online libel). |
| Misleading ads (RA 7394 Consumer Act) | DTI | Administrative fines up to ₱300k per act + criminal prosecution. |
6 | Borrower Remedies
File a Complaint with SEC’s Financing & Lending Division (FLD)
- Online portal allows submission of screenshots of interest computation and abusive messages.
- SEC may suspend operations ex parte and endorse criminal charges to DOJ.
Civil Action for Annulment or Reformation of Contract
- Goal: declare interest clause void; seek reimbursement of overpayment; damages for harassment.
Data Privacy Complaint (NPC COPS portal)
- Especially when collectors blast contacts or post defamatory material.
Criminal Complaints
- Estafa if lender misrepresents loan terms; grave threats or libel for harassment; swindling under Article 315 RPC if intent to defraud.
BSP Financial Consumer Protection Assistance Mechanism (FCPAM)
- For loans issued by banks, EMI-wallets, or their subsidiaries. BSP has restitution powers under RA 11765.
Debt Relief & Rehabilitation
- Insolvent individuals may now resort to Financial Rehabilitation and Insolvency Act (FRIA, RA 10142) “out-of-court” or “pre-negotiated” settlements that can slash usurious interest.
7 | Practical Compliance Guide for Legitimate FinTech Lenders
| Requirement | Practical Tip |
|---|---|
| Transparent APR | Compute on a declining balance basis and display in bold on the mobile screen before borrower clicks “Accept.” |
| Interest Cap | Keep nominal rate ≤ 6 %/month or justify actuarially why a higher risk-based rate is fair—a tall order under SEC MC 3-2022. |
| Collection Policy | Adopt NPC-approved consent language; prohibit bulk-SMS threats and “contact scraping.” |
| Licensing | Secure an SEC Certificate of Authority and register as a financing company if loans > ₱10,000. |
| Consumer Assistance | Establish a hotline and in-app chat; RA 11765 requires a resolution within 15 business days. |
| Record Preservation | Maintain audit-trail logs for each disclosure and acceptance screen to defend against “lack of informed consent” claims. |
8 | Emerging Issues
- AI-Driven Underwriting & Dynamic Pricing – Risk-based individualized rates may skirt published caps; regulators exploring “explainability” standards.
- Buy-Now-Pay-Later (BNPL) – Typically interest-free, but hefty late-payment fees could be deemed disguised interest.
- Cross-Border Apps – Lenders incorporated abroad but targeting Filipinos via social media; SEC asserts long-arm jurisdiction, but enforcement depends on platform cooperation.
- Proposed “Anti-Predatory Lending Act” – Pending bills seek to restore statutory usury ceilings (e.g., 36 % p.a.), criminalize interest > that ceiling, and create a FinTech Consumer Ombudsman.
9 | Conclusion
Even after the 1982 abolition of fixed usury ceilings, Philippine law never abandoned the principle that interest must be reasonable. The Civil Code’s unconscionability doctrine, reinforced by RA 11765 and aggressive SEC/NPC enforcement, supplies potent weapons against excessive OLA charges. Borrowers have multiple avenues—administrative, civil, and criminal—to obtain relief, while compliant FinTech lenders can thrive by embracing transparency, fair pricing, and respectful collection practices. As digital lending continues to evolve, the balance between financial inclusion and consumer protection will remain a dynamic—and heavily regulated—frontier.