The rise of Financial Technology (FinTech) in the Philippines has democratized access to credit through Online Lending Applications (OLAs). However, this convenience often comes at a steep price. For years, the industry operated in a "Wild West" environment regarding pricing, leading to predatory lending practices. In response, the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) introduced landmark regulations to curb "unconscionable" interest rates and protect Filipino consumers.
1. The Regulatory Framework: BSP Circular No. 1133
Prior to 2022, the Philippines did not have a formal usury law (the Usury Law was effectively suspended in 1982), meaning there was no legal ceiling on interest rates. This changed with BSP Circular No. 1133 (Series of 2021), which the SEC enforces through SEC Memorandum Circular No. 3 (Series of 2022).
These rules apply specifically to Financing Companies (FCs), Lending Companies (LCs), and their OLAs.
The Prescribed Caps
For "unsecured, short-term consumer loans" (loans not exceeding ₱10,000 and with a tenure of up to four months), the following limits apply:
- Nominal Interest Rate: Capped at a maximum of 6% per month (approximately 0.2% per day).
- Effective Interest Rate (EIR): This includes the nominal interest plus all other fees (processing fees, service fees, etc.). It is capped at 15% per month (approximately 0.5% per day).
- Penalties for Late Payment: Capped at 1% per month on the outstanding unpaid amount.
- Total Cost Cap: The total sum of all interest, fees, and penalties cannot exceed 100% of the total amount borrowed (the "Double-the-Principal" rule).
2. Identifying "Unconscionable" Interest
Even if a loan falls outside the specific ₱10,000/4-month window defined by Circular 1133, Philippine jurisprudence remains a shield against predatory lending.
The Philippine Supreme Court has consistently ruled in cases like Lara's Gifts & Decors, Inc. vs. PNB and Medel vs. Court of Appeals that while parties are free to stipulate interest rates, courts may reduce them if they are unconscionable, iniquitous, or contrary to morals.
Common Red Flags of Unconscionable Rates in OLAs:
- Hidden Fees: Charges that are deducted upfront (e.g., you borrow ₱5,000 but only receive ₱3,200).
- Short Tenures with High Penalties: Loans due in 7 days with a 20-30% "service fee" often exceed the EIR cap.
- Compound Penalties: When interest is charged on the penalties themselves, leading to a debt spiral.
3. Disclosure Requirements
Under the Truth in Lending Act (Republic Act No. 3765) and SEC rules, OLAs are legally required to provide a Disclosure Statement before the loan is perfected. This document must clearly state:
- The cash price or amount to be loaned.
- All down payments or credits.
- The individual amounts of all charges (service fees, processing fees, etc.).
- The total amount to be financed.
- The Effective Interest Rate (EIR) expressed as a percentage.
Note: Failure to provide this disclosure statement is a violation of the law and can be used as a basis to contest the validity of the interest being charged.
4. Prohibited Unfair Debt Collection Practices
High interest rates often go hand-in-hand with aggressive collection. SEC Memorandum Circular No. 18 (Series of 2019) prohibits OLAs from:
- Accessing a borrower's contact list without consent.
- Contacting people on the borrower's list who are not co-makers or guarantors.
- Using profane, abusive, or threatening language.
- Disclosing the borrower's debt information to third parties (shaming).
5. Legal Remedies for Borrowers
If you are a victim of an OLA charging rates above the SEC/BSP caps or engaging in harassment, you have several points of recourse:
| Action | Authority |
|---|---|
| Formal Complaint | File a complaint with the SEC Corporate Governance and Finance Department (CGFD) via their online portal. |
| Cease and Desist | The SEC has the power to revoke the Certificate of Authority (CA) of lending companies found in violation. |
| Criminal Prosecution | Violations of the Truth in Lending Act or the Cybercrime Prevention Act (for harassment) can be filed with the National Bureau of Investigation (NBI) or the PNP Anti-Cybercrime Group. |
Summary Table: Rate Caps at a Glance
| Component | Limit |
|---|---|
| Nominal Interest | Max 6% per month |
| Effective Interest (EIR) | Max 15% per month |
| Late Penalties | Max 1% per month |
| Total Cost Ceiling | 100% of the Principal |
Would you like me to draft a formal demand letter template that you can use to contest unconscionable interest rates with a lending company?