Usury, “Unconscionable” Interest, and What Courts Actually Do

1) The short legal framework (Philippine context)

In the Philippines, the question “Is 10% monthly interest legal?” does not have a simple yes/no answer because the law operates on two layers:

No fixed statutory ceiling for most loans today (because the old interest-rate ceilings under the Usury Law were effectively suspended by Central Bank/Monetary Board action).
Courts can still strike down or reduce interest that is “unconscionable,” “iniquitous,” or “excessive” under the Civil Code and equity.

So: 10% per month is not automatically illegal just because it is high, but it is highly vulnerable to being reduced by courts—often drastically—especially when imposed on consumers, small borrowers, or where the terms look oppressive.

2) What “usury” means (and why people still talk about it)

Usury is the charging of interest beyond a legally allowed maximum. Historically, the Philippines had interest ceilings under the Usury Law (Act No. 2655), with criminal/civil consequences.

However, the key modern shift is Central Bank Circular No. 905 (1982), which removed/suspended the interest ceilings that used to define “usury” in ordinary lending. The Usury Law was not exactly “wiped off the books,” but its rate ceilings ceased to operate as the controlling rule for most private loans.

Practical effect: In most lending arrangements today, the fight is less about “usury” as a numeric ceiling and more about unconscionability and fairness (plus disclosure and consumer-protection rules, where applicable).

3) The Civil Code rules that still matter a lot

Even without a numeric ceiling, interest is still governed by core Civil Code principles:

(A) Interest must be expressly agreed in writing

Under Civil Code Article 1956, no interest is due unless it is expressly stipulated in writing.

If a promissory note/contract is silent on interest, the lender generally cannot collect “interest” as interest.
However, the lender might still claim damages for delay (legal interest as damages) once the borrower is in default, depending on the circumstances.

(B) Freedom to contract is not absolute

Article 1306 allows parties to stipulate terms, provided they are not contrary to law, morals, good customs, public order, or public policy. Courts use this and equity principles to police abusive interest terms.

(C) Courts can reduce penalties and liquidated damages

If the loan also imposes harsh “penalty charges,” Article 1229 allows courts to equitably reduce penalties when they are iniquitous or unconscionable.

(D) Rules on interest as damages and “interest on interest”

Several Civil Code provisions affect how interest is computed and layered:

Article 2209: If an obligation consists in the payment of money and the debtor incurs delay, indemnity for damages is payment of interest agreed upon; absent stipulation, legal interest may apply.
Article 2212: Interest due shall itself earn legal interest from the time it is judicially demanded (often relevant when lenders try to collect unpaid interest plus more interest).

4) What counts as “unconscionable interest” in Philippine jurisprudence?

Philippine courts—especially the Supreme Court—have long recognized that even if parties sign a contract, interest can be reduced if it is unconscionable, excessive, shocking to the conscience, or contrary to morals/public policy.

Courts do not apply a single mechanical test, but commonly look at:

Rate level (e.g., per month vs per annum; effective annual cost)
Borrower’s bargaining position (necessity, distress, lack of meaningful choice)
Transparency and comprehension (was it explained; was it hidden in fine print; was it sprung later)
Security and risk (secured vs unsecured; short-term vs long-term; probability of default)
Additional charges piled on (penalty interest, service fees, attorney’s fees, collection costs)
Behavior during collection (harassment, abusive collection—may trigger separate liabilities)
Commercial context (consumer loan vs negotiated commercial facility between sophisticated parties)

Important: Courts often evaluate the total economic burden, not just the nominal “10% interest.” A loan labeled “10% monthly interest” plus “5% monthly penalty” plus “service fee” plus “attorney’s fees” can become so oppressive that courts are more likely to intervene.

5) How extreme is 10% per month, legally speaking?

10% per month = 120% per year (simple interest). If compounded monthly, the effective annual rate is even higher.

In Philippine case law patterns, monthly interest rates in the range of 3%–10% have frequently been subjected to judicial scrutiny, and many have been reduced—especially for personal loans and non-bank lending—because courts view them as excessive compared to reasonable compensation for the use of money.

That does not mean every 10% monthly clause is automatically void. But as a practical litigation reality:

Risk of being reduced is very high, especially where the borrower is not a sophisticated commercial party.
Courts commonly “reform” the obligation by reducing the rate rather than voiding the entire loan (the principal still must be paid).
Courts may also reduce penalties, attorney’s fees, and other add-ons.

6) “Legal” vs “enforceable”: the most useful distinction

When people ask “Is it legal?”, they often mean “Can the lender collect it in court?”

A high-rate clause can be:

Not a crime (no active usury ceiling for most loans), yet
Partly unenforceable (because the court reduces it to a fair/equitable rate).

So the more precise question is usually:

Will a Philippine court enforce 10% monthly interest as written?

Often, no—or not fully—depending on facts.

7) Banks, pawnshops, lending companies, cooperatives, and informal lenders: why category matters

Different lenders may be subject to different regulatory regimes:

Banks and BSP-supervised institutions: pricing is generally allowed within regulatory frameworks, but there are still consumer-protection and disclosure expectations and fairness standards.
Lending/investment companies (SEC-supervised): must comply with registration, reporting, and rules on lending practices; noncompliance can affect enforceability and expose the lender to sanctions.
Pawnshops: operate under special rules and are generally more regulated than casual private lenders.
Informal lenders / “5-6” style lending: most likely to face unconscionability challenges, and often have documentation problems (or collection practices issues).

Even if interest is contractually allowed, lenders can still get into trouble for:

Failure to disclose required loan terms/finance charges (Truth in Lending concepts apply strongly in consumer contexts),
Unfair debt collection/harassment, which can create separate civil/criminal exposure depending on acts.

8) Documentation traps: the “in writing” rule and contract clarity

If you are assessing whether 10% monthly interest can be collected, the first questions are often evidentiary:

Is there a signed written stipulation of interest?
- If the interest clause is missing or not proven, the court may disallow contractual interest.
Is it clear what the 10% applies to? Common ambiguities that become litigation issues:
- 10% per month on principal only or on principal plus accrued interest?
- Is it simple or compounded?
- Is it interest or a disguised penalty/service fee?
- When does it start—upon release, upon maturity, upon default?
Are there additional penalties and attorney’s fees? Courts may reduce these separately.

9) Default interest vs regular interest (and why stacking gets dangerous)

Many loan contracts have:

Regular (compensatory) interest: payment for use of money during the loan term; and
Default (penalty/moratory) interest: higher charge once the borrower is in delay.

If a contract imposes:

10% monthly regular interest and
another monthly penalty interest upon default,

the combined rate can become so punitive that courts are more inclined to reduce it.

A common judicial approach is to:

keep the principal,
allow some interest, but
cut the rate down to what the court deems reasonable, and/or
disallow double-counting (especially where “penalty interest” effectively duplicates the function of interest as damages).

10) What happens when courts reduce interest?

Philippine courts commonly do one or more of the following:

Reduce the stipulated interest to a lower rate viewed as equitable under the circumstances.
Reduce penalties under Article 1229.
Apply legal interest (especially where the stipulated rate is voided/reduced, or where interest was not properly stipulated but delay damages are due).
Recompute the obligation and prevent “interest on interest” from ballooning improperly, except where allowed by law (e.g., after judicial demand under the Civil Code rule).

Legal interest as a reference point (modern rule of thumb)

Since July 1, 2013 (per modern doctrine tied to BSP policy and Supreme Court guidance), 6% per annum is generally used as the legal interest rate for monetary judgments and forbearance of money, unless a valid stipulated rate applies. Older obligations can implicate the prior 12% per annum regime for certain periods. In real cases, courts often anchor reductions around these reference rates or around a modest monthly equivalent, depending on the timeline and facts.

11) Can borrowers get relief without denying the debt?

Yes. A borrower can admit the principal obligation but challenge the interest as unconscionable. Common defenses/arguments include:

Unconscionability/excessiveness of the interest rate
Lack of written stipulation (Article 1956)
Ambiguity in computation (construed against the drafter in many settings)
Iniquitous penalty clauses (Article 1229)
Public policy and equity (Article 1306, general principles)
Improper compounding/stacking
Failure to meet disclosure requirements (consumer lending contexts)
Abusive collection practices (may support counterclaims or separate actions)

12) Can lenders still collect something if 10% monthly is reduced?

Almost always, yes—the principal remains due, and courts typically allow reasonable interest (contractual if valid and not excessive; otherwise legal/equitable interest), plus proven costs where allowed.

A lender who relies on a very high interest clause risks:

collecting less than expected after judicial reduction,
protracted litigation due to recomputation disputes,
exposure if collection methods violate consumer or criminal laws.

13) Practical “red flags” that make 10% monthly more likely to be struck down

Courts are more likely to reduce the rate when several of these appear:

Borrower is an individual/consumer in distress; take-it-or-leave-it terms
Short document, no explanation, fine print, or confusing add-ons
Multiple overlapping charges (interest + penalty interest + “service fee” functioning as interest)
Security exists (e.g., collateral) but rate is still extremely high
Effective rate becomes astronomical due to compounding and penalties
Attorney’s fees are fixed at a large percentage automatically
Collection conduct is coercive, humiliating, or harassing

14) Bottom line for 10% monthly interest in the Philippines

Not automatically “illegal” solely because it exceeds a numeric ceiling (modern Philippine regime generally does not impose a universal statutory cap for ordinary private loans).
Very commonly treated as “unconscionable” in practice, depending on context, and therefore highly susceptible to judicial reduction.
Enforceability depends on facts: bargaining power, documentation, transparency, risk, security, add-on penalties, and overall fairness.

15) Key takeaways (the “all-you-need-to-remember” set)

Interest must be in writing to be collectible as interest (Civil Code Art. 1956).
No universal ceiling for most loans today, but courts police excessive rates through unconscionability and public policy.
10% monthly (≈120% yearly) is a classic trigger for judicial scrutiny, especially in consumer/personal lending.
Penalties and attorney’s fees can be reduced separately (Civil Code Art. 1229).
When courts intervene, they usually keep the principal, then recompute interest/penalties to a reasonable level, often referencing legal interest principles and equitable considerations.