Excessive Interest Rates and Usury Law in the Philippines

A Comprehensive Legal Overview

1. Historical Foundations

Year	Instrument	Key Points
1916	Act No. 2655 (Usury Law)	• Fixed the maximum lawful interest at 6% p.a. for loans in general and 12% for pawnbroking. • Required a written stipulation for any interest to be collectible (still found in Civil Code art. 1956). • Declared stipulations above the ceiling void, but the principal remained recoverable.
1935 & 1946	Amendments (e.g., C.A. No. 563)	Raised ceilings to 8 % and later 12 % on ordinary loans; higher for certain credit modalities.
1973 Constitution	Art. XIV §4(2) (now Art. XVI §3, 1987 Const.)	Expressly authorizes Congress to protect consumers from “usurious practices”.
1981–1982	CB Circulars 705 & 905	• Circular 705 (1981) liberalized ceilings for banks. • Circular 905 (Dec 22 1982) “SUSPENDED” all interest ceilings under the Usury Law, effectively deregulating rates but not repealing the statute itself.

Practical effect: Since 1982, no statutory cap governs contractual interest; regulation shifted to the* Bangko Sentral ng Pilipinas* (BSP) and the courts’ power to strike down “unconscionable” rates.

2. Current Statutory & Regulatory Framework

Usury Law remains in the statute books • It survives as “dormant” legislation—its ceilings shelved, but its other provisions (e.g., need for a written interest stipulation) still apply.
Bangko Sentral ng Pilipinas (BSP) Oversight
- General rule: BSP does not set across-the-board caps, except where expressly provided by special circulars.
- Notable BSP issuances
  - Circular 799 (2013) – Caps finance charges for credit cards at 3% per month on outstanding unpaid balance; late-payment fee max ₱1,000.
  - Circular 1133 (2022) – Retains the credit-card cap and re-evaluates yearly.
  - Circular 1098 (2020) – Caps interest on salaried payday loans from lending/financing companies at 0.8% per day (≈24% per month); sets maximum processing and penalty fees.
Special Laws Imposing Interest Controls
- Truth in Lending Act (R.A. 3765) and BSP's Implementing Regs: Mandate full disclosure of Annual Percentage Rate (APR) and all finance charges.
- Pawnshop Regulations: Monetary Board Res. 703 (2009) fixes interest & service charge formulas.
- Agricultural & micro-finance credit enjoy subsidized or preferential rates under sector-specific statutes (e.g., R.A. 10000).
Lending Company Regulation Act (R.A. 9474) & Financing Company Act (R.A. 5980 as amended) • Empower the SEC to suspend or revoke licenses for “grossly exorbitant” rates. • Require disclosure and prohibit hidden charges.

3. Jurisprudential Doctrine on “Unconscionability”

Philippine courts assume a two-tier review:

Case	Interest Charged	Ruling / Principle
Medel v. Court of Appeals (G.R. 131622, Nov 27 1998)	5.5% per month (≈66 % p.a.)	Struck down as unconscionable; reduced to 12 % p.a. — seminal case.
Spouses Abella v. Spouses Abella (G.R. 164042, Aug 1 2007)	8% p.m.	Courts may motu proprio reduce even if no party prays for it.
Spouses Toring v. Ganzon (G.R. 190706, Aug 28 2019)	7% p.m.	Reiterated “equity jurisdiction” to temper rates; penal interest also subject to reduction.
Nacar v. Gallery Frames (G.R. 189871, Aug 13 2013)	—	Fixed legal interest (in judgments) at: 6 % p.a. for forbearance of money (post-July 1 2013); supplanted the old 12 % CB rate.
Home Credit Philippines v. Bautista (G.R. 247580, Jan 26 2021)	9% p.m. + penalties	Reiterated pro-consumer stance; contracts of adhesion strictly construed.

Doctrine crystallized: A rate may be freely stipulated, but courts will annul or moderate it when it shocks the conscience—typically anything above 36-48 % p.a., though context matters (e.g., micro-finance, pawn).

4. Civil and Criminal Consequences

Aspect	Rule	Notes
Civil	Stipulation above lawful ceiling (if one exists) or deemed unconscionable → void only as to the excess; lender forfeits differential.	Art. 1411-1412 Civil Code on illegal contracts vis-à-vis public policy.
Criminal	Usury Law provided fines/ imprisonment; but with ceilings suspended, criminal liability lies only for: • Violations of special BSP caps (credit cards, payday loans, pawnshops). • Securities-law offenses (e.g., unlicensed lending, R.A. 8799).	Loan-sharking often prosecuted under R.A. 10175 (Cybercrime Act) for online harassment, R.A. 11642 for debt-shaming, or RPC Art. 287 (unjust vexation).

5. Procedural Remedies for Borrowers

Judicial Action – File a civil case to annul or reform the stipulation; courts routinely slash interest and surcharges.
Regulatory Complaint
- BSP – Consumer Assistance Mechanism for bank-related loans.
- SEC – Financing & Lending Companies Division for non-bank lenders and online apps.
Small Claims (A.M. 08-8-7-SC as amended) – Up to ₱1 million; summary procedure, no lawyer needed.
Alternative Dispute Resolution – Under R.A. 9285; many fintech platforms embed ADR clauses.

6. Emerging Issues

Issue	Brief Discussion
Fintech & “Buy-Now-Pay-Later”	Non-bank digital lenders argue that Circular 905 still exempts them from caps, but BSP/SEC now coordinate on Sandboxes to avoid predatory pricing.
Data-driven Risk-Pricing	AI-based credit scoring may justify differentiated rates; transparency & anti-discrimination rules loom large.
Regional Initiatives	ASEAN “Responsible Lending Principles” (2021) may push the Philippines to re-impose statutory caps akin to Thailand’s 15 % p.a. ceiling on personal loans.
Legislative Bills (19th Congress)	Several House & Senate bills propose restoring a 35 % p.a. cap across the board; still pending.
Debt-Shaming & Privacy	R.A. 10173 (Data Privacy Act) penalizes harassing collection methods; SEC Memorandum Circular 18-2019 forbids lenders from accessing borrowers’ phone contacts without consent.

7. Guidelines for Drafting Valid Interest Clauses

Put it in Writing – Art. 1956 Civil Code.
State the Nominal % p.a. and Effective APR – Compliance with R.A. 3765 & BSP Regs.
Include a Re-pricing Mechanism – Tie to a publicly available benchmark (e.g., 1-yr BVAL + spread).
Provide for Grace Periods & Penalty Caps – Align with BSP Circular 1098 or credit-card circulars.
Avoid Compounded “interest-on-interest” without express stipulation – Disallowed under Art. 1959.
Insert a Severability Clause – So that if a court voids the rate, the principal & other terms survive.

8. Practical Benchmarks (2025)

Loan Type	Common Market Rate	Regulatory Cap (if any)
Prime corporate	6 – 8 % p.a.	None
Housing (Pag-IBIG)	6.25 – 7.5 % fixed	Government-set
Credit cards	3 % per month on unpaid balance	BSP Circular 799/1133
Salary/Payday loans (≤ ₱10 k; ≤ 4 mos.)	20 – 30 % p.a.	0.8 %/day max (≈292 % p.a.) but effective cap incl. fees per Circular 1098
Pawnshop pledge	2 – 4 % per month + service fee	BSP-fixed formula

9. Key Take-Aways

No general statutory ceiling exists today because Circular 905 (1982) merely suspended Usury Law rates; courts fill the gap by invalidating unconscionable stipulations.
BSP selectively re-imposes caps in sensitive sectors (credit cards, micro-loans) while relying on disclosure and competition in others.
The Supreme Court remains the ultimate arbiter—recent decisions show a clear trend toward borrower protection, slashing rates >36 % p.a. unless convincingly justified.
Lenders must balance contractual freedom with the risk of judicial intervention; careful drafting and full transparency are the best defenses.
Congress continues to debate restoring a universal cap, but for now, “reasonableness” as defined by jurisprudence and regulator-specific ceilings governs Philippine lending practice.

10. Suggested Further Reading

Central Bank Circular 905 (1982) and subsequent Monetary Board resolutions.
Medel v. CA & Nacar v. Gallery Frames – seminal Supreme Court pronouncements on interest.
BSP Financial Consumer Protection Framework (Circular 1166 series 2023).
SEC Memorandum Circular 19-2022 – Guidelines on Online Lending.
Asian Development Bank Working Paper No. 1247 (2024): Digital Lending and Usury in Southeast Asia.

Prepared 24 June 2025