This is an educational legal overview of Philippine rules on loan interest and common remedies. It is not a substitute for tailored legal advice.

I. Core Legal Framework

1) Freedom to Stipulate vs. Limits of Public Policy

Civil Code, Art. 1306 recognizes freedom of contract, including the right to agree on interest.
That freedom is not absolute: stipulations that are contrary to law, morals, good customs, public order, or public policy may be void or reformed.

2) Usury Law and the “No-Ceiling” Regime

The Usury Law (Act No. 2655) still exists, but Central Bank (now BSP) Circular No. 905 (1982) suspended interest ceilings, effectively deregulating rates.
Practical effect: Parties may generally agree on any rate if the interest is expressly stipulated in writing (Civil Code, Art. 1956).
But: Philippine courts routinely strike down or reduce “unconscionable” or “excessive” rates as void for being contrary to morals/public policy.

3) Judicial Control Over Excessive Interest and Penalties

Courts may annul or reduce:
- Conventional interest deemed unconscionable (jurisprudence has invalidated multi-percent per month rates).
- Penalty charges under Art. 1229, which allows equitable reduction when penalties are iniquitous or unconscionable.
No interest agreed in writing? Only legal interest applies.

4) Legal Interest (by default or after judgment)

The Supreme Court (e.g., Nacar v. Gallery Frames, 2013) aligned legal interest at 6% per annum (replacing the old 12%).
Uses of the 6% rate:
- When no written interest stipulation exists (loan/forbearance of money).
- Judgments awarding sums of money (from finality, or from default depending on the nature of the claim).

5) Sector-Specific Rules & Consumer Protection

Banks and credit cards are subject to Bangko Sentral ng Pilipinas (BSP) consumer protection rules and disclosure requirements (e.g., truth-in-pricing, effective interest rate (EIR) disclosures, fee transparency).
Lending and financing companies are regulated by the SEC (RA 9474 for lending companies; RA 8556 for financing companies) and must comply with licensing, disclosure, and fair-collection standards (e.g., SEC rules against harassment, shaming, unauthorized contacts).
Financial Consumer Protection Act (RA 11765, 2022) strengthened enforcement and remedies across BSP, SEC, and Insurance Commission.
Data Privacy Act (RA 10173) and NPC issuances protect consumers from unlawful data processing (e.g., scraping contact lists to shame debtors).

Key idea: Even without a statutory ceiling, courts + regulators police abusive pricing and collection practices.

II. What Counts as “Unconscionable” Interest?

There is no fixed statutory number. The Supreme Court looks at totality of circumstances, often flagging rates expressed as multiple percent per month (e.g., 4%–10% monthly and beyond) as excessive, especially when combined with:

Steep penalty interest (e.g., an extra 3%–5% per month on top),
Hidden fees, add-on schemes that inflate the true cost, or
Vulnerable borrowers and adhesion contracts.

Markers the courts and regulators consider:

Effective cost: not just the nominal rate, but EIR/APR including fees.
Disparity of bargaining power and transparency of terms.
Stacking of interest, penalties, and compounding without clarity.
Good faith and commercial reasonableness.

III. Anatomy of Loan Pricing (So You Can Spot Abuses)

1) Nominal Monthly vs. Annualized Rates

2% per month is not 24% p.a. if fees and add-on methods are used. Always compute the EIR/APR.

2) Add-On vs. Declining Balance

Add-on interest is charged on the original principal throughout the term, making the true cost much higher than the nominal rate.
Declining balance charges interest on the outstanding principal, usually cheaper.

3) Fees that Inflate EIR

Processing, disbursement, ** collection**, insurance, and pre-computed interest netted upfront can spike the effective rate.
Rule of thumb: If you receive less cash than the “principal” on paper, your EIR is higher than the posted rate.

IV. When You’re Facing a High-Interest Loan: A Step-by-Step Game Plan

Step 1 — Gather Your Paper Trail

Loan contract, promissory note, disclosures, amortization schedules, receipts, SMS/emails, collection recordings.
Check if interest is in writing (Art. 1956). If not, argue that only legal interest (6% p.a.) can apply.

Step 2 — Compute the True Cost

Reconstruct the EIR/APR including all fees and penalties.
Identify if the lender used add-on methods or front-loaded fees.

Step 3 — Identify Legal Pressure Points

Unconscionability of the interest and/or penalty (ask court to strike down or reduce).
Lack of written stipulation (apply 6% p.a.).
Ambiguity construed against the drafter (loan provider).
Improper collection (harassment/shaming → regulatory complaints and damages).
Defective disclosures (Truth-in-Lending principles; sectoral circulars).
Unauthorized data use (Data Privacy Act).

Step 4 — Negotiate (Often the Fastest Relief)

Seek rate reduction, penalty condonation, term extension, or payment holiday.
Propose restructure: lower rate, longer tenor, waive penalties; ask for written confirmation.
Where feasible, refinance with a cheaper lender (banks/co-ops) to retire the high-rate loan.

Step 5 — Escalate to Regulators (Parallel to or before suing)

Banks / credit cards: file with the bank’s Consumer Assistance Unit; escalate to BSP if unresolved.
Lending/financing companies & OLAs: complain to SEC (licensing, unfair collection, abusive rates/fees).
Insurance-tied loans: issues on forced insurance go to the Insurance Commission.
Data/harassment: National Privacy Commission for privacy breaches; law enforcement for grave threats, libel, cyber harassment.

Step 6 — Judicial Remedies

Defensive (if you’re sued):
- Plead unconscionability of interest/penalty; seek reformation or nullity of the interest clause; invoke Art. 1229 for penalty reduction; insist on legal interest if no valid stipulation.
- Challenge usurious effect despite Circular 905 (courts can still strike down abusive rates).
- Question attorney’s fees, liquidated damages, and compounded interest if not clearly agreed.
Offensive (if you sue):
- File an action to declare interest/penalty void or to recompute obligations; seek damages for abusive collection and privacy violations.
- Small Claims may be available for money disputes within the current threshold (streamlined, no lawyers required); for larger amounts, file a regular civil action.
- Injunctions (e.g., to stop harassment) in proper cases.

V. Special Topics

1) Credit Cards

Subject to BSP caps and fee rules that change over time (installment add-on caps, interest ceilings, late-fee limits).
Providers must disclose EIR, fees, and changes to terms.
Dispute unauthorized transactions promptly; follow the issuer’s internal process before regulatory escalation.

2) Microfinance and Salary Loans

Cooperatives may have different pricing/benefit structures under CDA oversight.
Payroll deductions should be authorized and proportionate; challenge open-ended or double deductions.

3) Online Lending Apps (OLAs)

Must be SEC-registered and licensed.
Common violations: contact-list harvesting, public shaming, threats—actionable under SEC rules and the Data Privacy Act.

4) Collateral & Foreclosure

Real estate mortgages follow statutory foreclosure procedures (judicial or extrajudicial under Act 3135).
Even in foreclosure, unconscionable interest/penalty can still be recomputed; surplus after sale should be accounted to the debtor.

VI. Drafting & Negotiation Toolkit

A. Clauses to Watch (or Push Back On)

Interest quoted monthly without an annualized EIR.
Add-on interest with upfront deductions.
Penalty interest per month stacked on top of normal interest, plus daily late charges.
Automatic compounding (“interest on interest”) without clear basis.
One-sided escalation clauses (“we can change rates any time”).
Cross-default clauses that trigger penalties across unrelated facilities.

B. Practical Negotiation Script (Customize)

“I intend to pay, but the effective interest and penalties are excessive. Jurisprudence allows courts to reduce unconscionable rates and penalties and to apply 6% legal interest where the stipulation is invalid. I’m proposing a restructure at [X]% p.a., waive accrued penalties, and extend the tenor to [months]. This improves your recovery while avoiding litigation and regulatory action.”

C. Sample Demand Points (for a letter or email)

Ask for:
1. Full reconciliation of the account (interest method, dates, fees).
2. EIR/APR computation and copies of signed disclosures.
3. Cessation of unlawful collection practices and data processing.
4. A written restructure offer within 15 days.

VII. Litigation & Computation Pointers

When no valid interest stipulation exists → claim/defend at 6% p.a. (loan/forbearance).
When only the rate is void → courts often retain the principal, invalidate or reduce the interest/penalty, and may impose 6% p.a. from default or judicial demand.
Penalty reduction (Art. 1229) is common when combined charges become iniquitous.
Attorney’s fees/liquidated damages must be reasonable and contractually or statutorily grounded.
Compounding typically requires clear stipulation; otherwise, interest is simple.
Partial payments should be applied per contract; absent clarity, Civil Code default rules on application of payments may help the debtor.

VIII. Compliance Checklist for Lenders (and a Borrower’s Audit List)

□ Valid license/authority (BSP bank/quasi-bank, SEC lending/financing, CDA cooperative).
□ Clear written interest and fee schedule; EIR/APR disclosed.
□ No harassment or shaming; contacts limited to lawful channels.
□ Data privacy notices and lawful processing.
□ Fair collection (no threats, defamation, or illegal access).
□ Reasonable penalties; no stealth compounding.
□ Accessible complaint channels and timelines.

IX. Frequently Asked Questions

Q1: Can a lender charge any rate it wants? Generally yes—if in writing—because ceilings are suspended. However, courts may void or reduce excessive or unconscionable rates and penalties.

Q2: I signed a contract at 5% per month plus 3% penalty per month. Am I stuck? Not necessarily. You can seek judicial reduction of the rate/penalty as unconscionable, or negotiate a restructure referencing that doctrine.

Q3: The lender never mentioned interest, only “standard charges.” If interest isn’t expressly stipulated in writing, you can argue that only the 6% legal interest applies.

Q4: The collector is messaging my family and office. Document everything. File complaints with the provider, then SEC/BSP, and raise Data Privacy and harassment violations.

Q5: Can I use Small Claims? If your claim is within the Supreme Court’s current threshold, yes—streamlined and document-based. Otherwise, file a regular civil action.

X. Action Plan You Can Use Today

Collect documents and recompute your EIR/APR.
Write the lender: dispute unconscionable rates/penalties; request restructure; demand an accounting.
Escalate unresolved issues to the proper regulator (BSP/SEC/IC) and NPC for privacy abuses.
Prepare for litigation or defense: ask counsel to plead unconscionability, Art. 1229 penalty reduction, and 6% legal interest where appropriate.
Consider refinancing with a cheaper, reputable institution to exit the high-cost loan.

Bottom Line

In the Philippines, interest ceilings are suspended, but the law still protects borrowers: interest must be in writing, excessive rates and penalties can be struck down or reduced, and regulators police abusive practices. With the right documents, computations, and strategy, you can restructure unaffordable debt or defend against predatory terms while safeguarding your rights.