High Interest & Penalty Charges in Philippine Online Loan Apps: Legal Landscape, Limits, and Remedies
by ----- (For academic discussion only; not a substitute for individualized legal advice.)
1 | Why the Issue Matters
Smart-phone lending (“online loan apps” or OLAs) has exploded since 2017, supplying payday-style credit in minutes. Borrowers often discover that a ₱3 000 cash-out can snowball into ₱6 000–₱12 000 in only a few weeks once interest, “service fees,” and penalty charges are tacked on. This article maps the entire legal framework that determines when those charges cross the line from merely high to unlawful.
2 | Governing Sources of Law
| Layer | Key Instruments | Scope for OLAs |
|---|---|---|
| Statutes | • Act No. 2655 (Usury Law, 1916) – interest caps suspended by CB Circular 905 (1982) • RA 9474 (Lending Company Regulation Act, 2007) • RA 3765 (Truth in Lending Act, 1963) • RA 10870 (Credit Card Industry Regulation Act, 2016) • RA 11765 (Financial Products and Services Consumer Protection Act, 2022, “FCPA”) |
Applies to any entity “engaged in granting loans” whether physical or digital. |
| Regulators & Circulars | • Bangko Sentral ng Pilipinas (BSP) – caps on credit-card interest (Circular 1098, 2020, as amended) and consultative papers on small-value, short-term loans. • Securities and Exchange Commission (SEC) – licensing of lending/financing companies; Memorandum Circulars 18-2019 (Fair Collection), 19-2019 (App registration), 3-2021 (Mandatory disclosure of Online Lending Platforms). |
SEC covers non-BSP supervised OLAs (the vast majority). BSP caps bind banks, e-wallets that are banks or e-money issuers. |
| Civil Code | Arts. 1956, 1961 (interest must be in writing; restriction on compound interest); Art. 1229 (courts may reduce penalty if “iniquitous or unconscionable”). | Applies to every loan contract, on-line or off-line. |
| Supreme Court jurisprudence | Doctrine that no statutory ceiling ≠ free-for-all; “unconscionable rates are void.” Courts often pare down interest to 12% p.a. (pre-2013), then 6% p.a. after Nacar v. Gallery Frames (G.R. 189871, Aug 13 2013). | OLAs are equally subject; litigants have already invoked these cases in small-claims courts. |
| Data-Privacy & Consumer laws | RA 10173 (Data Privacy Act); deceptive or harassing collection is punishable. FCPA (2022) now criminalizes abusive practice and empowers regulators to set caps. | Outlaws “contact scraping” and public shaming texts used by many rogue OLAs. |
3 | Interest vs. Penalty: What Exactly Is Being Capped?
| Charge Type | Legal Basis/Limit |
|---|---|
| Contractual interest (compensation for use of money) | No numeric ceiling since 1982, but must be “reasonable and not unconscionable.” |
| Penalty interest / late-payment charge | Treated as liquidated damages; subject to Art. 1229 moderation. |
| Processing / service fee | Must be fully disclosed (RA 3765, FCPA §5); if disguised interest it is folded into the Annual Percentage Rate (APR) for disclosure purposes. |
| Collection fee | Allowed only if expressly stipulated and cost-based; otherwise deemed unconscionable. |
4 | When Is a Rate “Unconscionable”?—Supreme Court Tests
| Case | Rate Challenged | Court’s Action |
|---|---|---|
| Spouses Abella v. Rural Bank of Cabadbaran (G.R. 164734, 2008) | 5.5 % per month (66 % p.a.) | Reduced to 12 % p.a. |
| Macalinao v. Banco Filipino (G.R. 144781, 2002) | 5 % penalty per month | Struck down; allowed 12 % p.a. regular interest only. |
| Bartolome v. Mirasol (G.R. 219272, 2016) | 5 % interest + 5 % penalty per month | Both reduced to 6 % p.a. simple interest. |
| BPI Family Savings Bank v. Spouses Velarde (G.R. 205568, 2021) | 24 % p.a. | Upheld; court found it “within commercial rates” for secured bank loans. |
Key Take-aways
- Total cost matters. Courts look at the aggregate of interest plus penalties plus compounding.
- Time and context matter. A rate that is commercial for a secured, long-term corporate loan might be unconscionable for a 14-day salary advance.
- Judicial notice of market rates. After Nacar (2013) the baseline is 6 % p.a. for monetary judgments; anything several multiples above may raise red flags.
5 | Special Caps Already in Force
| Product | Regulator | Cap |
|---|---|---|
| Credit Cards | BSP Circular 1098 (2020, kept in force 2023) | 2 % per month (24 % p.a.) on unpaid balances; 1 % per month on instalments; max ₱200 processing fee. |
| Pawnshop Loans | BSP Circular 1133 (2021) | Effective yield must be disclosed; no numeric ceiling but extensive form-disclosure and cooling-off period. |
| Payday/BNPL proposals | BSP Discussion Memo (2023, not yet a Circular) | Draft cap of 0.4 % per day (~12 % per 30 days) and max 5 % one-time processing fee for loans ≤₱10 000, tenor ≤90 days. |
Online-only lending companies that are not banks or e-money issuers remain under SEC; no hard cap yet, but FCPA gives SEC power to impose one.
6 | Enforcement Against Rogue Apps
- SEC cease-and-desist & revocation – Over 100 OLA certificates have been revoked since 2019 for excessive charges or harassment.
- NPC (National Privacy Commission) cases – Multiple apps fined and ordered closed for scraping phone contacts and sending “shaming” SMS blasts.
- Criminal raps – Prosecutors have indicted collection agents for grave coercion, unjust vexation, and cyber-libel tied to public shaming posts.
- App-store takedowns – SEC regularly coordinates with Google Play & Apple App Store to delist non-compliant OLAs.
7 | Borrower Remedies
| Pathway | What to File | Typical Outcome |
|---|---|---|
| SEC Complaint (RA 9474 / MC 18-2019) | Online form + evidence of rates or harassment | Investigation; possible refund, suspension of charges, app shutdown. |
| FCPA Complaint (2023-) | Through BSP or SEC, depending on lender type | Regulator may order restitution, cap interest, or impose fines up to ₱2 M per offense. |
| Small Claims (≤ ₱1 million) | Civil case to annul/reform interest | Courts often reduce rate and wipe out penalties. |
| Data-Privacy Complaint | NPC online portal | Cease-and-desist vs. contact scraping; monetary penalties to lender. |
| Criminal Complaint | Barangay/Katarungang Pambarangay, then Prosecutor | Possible arrest for coercion, libel, threats; often leveraged to negotiate settlement. |
8 | Compliance Checklist for Legitimate OLAs
- Secure both a Lending/Financing Company license and separate registration for each online platform (SEC MC 3-2021).
- Disclose the Annual Percentage Rate (APR) and all fees up-front (RA 3765; FCPA).
- Cap interest and penalties at levels comparable to peer-to-peer or micro-finance benchmarks (~2–3 % per month) to avoid “unconscionable” tag.
- No contact-list harvesting or public shaming.
- Implement a 1-day “cooling-off” period and easy opt-out, now considered best practice under FCPA guidelines.
9 | Likely Future Developments (2025–2026 Outlook)
- Statutory cap for short-term micro-loans – Bills pending in both chambers propose a hard 36 % p.a. or 0.5 % per day ceiling.
- BSP Circular on BNPL & salary-deduction loans – expected to finalize the 0.4 %/day cap and mandate credit bureau reporting.
- SEC fintech sandbox – platforms that use alternative data for credit scoring may receive conditional licenses; interest limits are part of the sandbox KPIs.
- Stronger criminalization – Draft amendments to RA 9474 insert explicit penalties for “interest exceeding statutory or regulatory ceilings.”
10 | Conclusion
While no across-the-board statutory ceiling exists today, Philippine law corrals abusive online-loan pricing through a mix of:
- (a) Regulator-imposed caps for particular products (credit cards, soon BNPL);
- (b) Civil Code unconscionability doctrine that lets courts strike down or pare back sky-high rates and penalties; and
- (c) FCPA enforcement powers allowing BSP and SEC to police unfair, deceptive, or abusive acts.
For borrowers, that means there is real—if sometimes under-used—recourse against a ₱3 000 loan ballooning into a ₱12 000 nightmare. For honest fintech lenders, staying within transparent, reasonable, and well-disclosed pricing is not only ethical but the surest way to avoid the SEC blacklist and keep a coveted spot in the app stores.
Prepared 24 June 2025, Manila.