I. Framing the Issue

The core question is: In the Philippines, is a 1.5% monthly interest rate (about 18–19.5% per annum) considered usurious, unconscionable, or exorbitant in the eyes of the law?

The short, practical answer is:

There is no fixed statutory ceiling anymore, so 1.5% per month is not automatically illegal or “usurious.” However, courts can still strike it down or reduce it if, considering all the circumstances, it becomes unconscionable, iniquitous, or contrary to public policy.

To understand why, we have to look at the evolution of usury regulation, the current legal framework, and how Philippine courts analyze high interest rates.

II. Historical Background: The Usury Law and Its “Suspension”

Act No. 2655 (The Usury Law)
- Historically, the Philippines had a Usury Law that fixed maximum interest rates.
- Charging more than these ceilings was usurious and could have legal consequences.
Central Bank/Bangko Sentral Circulars (Deregulation)
- Beginning in the 1980s, the Bangko Sentral ng Pilipinas (BSP) (then Central Bank) issued circulars removing ceilings on interest rates.
- The most famous is Central Bank Circular No. 905 (1982), which “suspended” the effectivity of the Usury Law ceilings.
- Important nuance:
  - The Usury Law was never formally repealed, but all its interest ceilings were rendered inoperative.
  - In practice, there is no statutory maximum interest rate in general, unless a special law or BSP regulation sets a cap for a specific product/sector.
Effect Today
- Freely negotiated interest rates are generally allowed.
- But this freedom is not absolute: courts can still intervene where the rate is excessive, iniquitous, or unconscionable.

III. Current Legal Framework on Interest in the Philippines

1. Civil Code Provisions

Several provisions of the Civil Code are central:

Article 1956

“No interest shall be due unless it has been expressly stipulated in writing.”

Implications:
- Interest must be (a) expressly stipulated, (b) in writing.
- If not, the creditor cannot legally demand interest (except legal interest as damages when allowed).
Article 1306 – Autonomy of Contracts Parties may establish such stipulations as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.
- This is the basis for freedom to fix interest rates.
- But it also allows courts to invalidate or modify contracts that offend public policy or morals, which includes grossly unfair interest stipulations.
Articles 19, 20, and 21 – Abuse of Rights and Acts Contrary to Good Customs
- These provisions require everyone, in the exercise of rights, to act with justice, give everyone his due, and observe honesty and good faith.
- A lending practice that abuses a borrower’s weakness might be attacked under these articles.
Article 1229 (on penalties) & related provisions
- Courts may equitably reduce a penalty or liquidated damages if the obligation has been partly or irregularly complied with or if the penalty is iniquitous or unconscionable.
- Courts often analogize excessive interest to a penalty, and reduce it on this basis.
Articles 1411–1422 – Void or Inexistent Contracts
- If an agreement violates public policy, the offending stipulation may be void, but the rest of the contract may stand, depending on severability.

2. Special Laws and Regulations (Overview)

There are sector-specific laws and regulations that interact with interest rates:

Lending Company Regulation Act (RA 9474)
- Regulates lending companies (non-bank lenders).
- Focuses on licensing, reporting, and transparency rather than fixed interest caps.
- BSP and the SEC may issue rules that affect allowable charges and disclosure.
Financing Company Act (RA 8556)
- Similar role for financing companies.
Truth in Lending Act (RA 3765)
- Requires disclosure of true cost of credit, including interest and other finance charges.
- The issue here is often proper disclosure, not a numerical ceiling.
Consumer Act (RA 7394)
- Contains principles on fairness, deceptive practices, and abusive collection, which can color how interest conditions are judged.
Credit Card and Other BSP Regulations
- For specific products like credit cards, BSP may impose explicit caps or guidelines on interest and charges.
- These caps can and do change over time, so you always have to check the most recent BSP circulars for specific products.

Key takeaway: Outside specific capped products, no general law sets a fixed maximum interest rate, but general principles of fairness, public policy, and unconscionability still apply.

IV. The Role of the Supreme Court: “Unconscionable” Interest

Even with deregulation, the Philippine Supreme Court has repeatedly held that excessive, iniquitous, or unconscionable interest rates are void or subject to reduction.

1. General Judicial Doctrine

Typical themes from jurisprudence:

Freedom to contract is not absolute.
- Courts will respect agreed interest rates unless they are shocking to the conscience, grossly disproportionate, or clearly oppressive.
No rigid numerical rule.
- The Court has not set a new fixed maximum rate after the Usury Law ceilings were suspended.
- Instead, it uses a case-by-case standard of “unconscionability.”
Excessive interest may be:
- Nullified (stipulation void); and
- Replaced with a reasonable rate, often the “legal interest” rate applicable as judicial interest/damages for the period involved.
Typical rates found unconscionable in past cases (just as general examples):
- 5.5% per month (66% per annum)
- 6% per month (72% per annum)
- Sometimes 3% per month (36% per annum) or higher, depending on context.
In these decisions, the Court often uses words like “iniquitous,” “unconscionable,” “exorbitant,” “contrary to morals,” etc., and reduces the rate significantly.
Consequence when interest is void/unconscionable:
- Principal obligation remains valid (borrower must still repay the principal).
- The interest stipulation is void, and the court usually substitutes a lower interest rate, such as the legal interest used for damages for that timeframe.
- If there is a separate penalty charge on top of the interest, that, too, may be reduced or nullified.

2. Legal Interest vs. Contractual Interest

The Supreme Court has clarified (especially in later cases like Nacar v. Gallery Frames) that:

Legal interest (e.g., 12% before, 6% later) is not the same as contractual interest.
Legal interest applies:
- As compensation for delay (interest as damages, mora), or
- On judgments awarding sums of money.
Contractual interest is the rate actually agreed upon in the loan/credit contract.

Courts may compare contractual rates to the legal interest rates when assessing unconscionability. A contractual rate that is several times higher than the legal interest rate may raise concern.

V. Numerical Perspective: What Does 1.5% Monthly Really Mean?

A rate of 1.5% per month can be understood in two ways:

Simple annual equivalent
- 1.5% × 12 months = 18% per annum (simple).
Compounded monthly
- If interest is compounded monthly at 1.5%, the effective annual rate is: [(1 + 0.015)^{12} - 1 ≈ 19.56%]

So, 1.5% per month ≈ 18–19.5% per year, depending on whether compounding is used.

Compared with:

Historical legal interest rates used by courts as damages (e.g., 12%, later 6%).
Higher rates struck down as unconscionable (easily 36%–72% per annum or more).

1.5% per month is clearly lower than the rates generally condemned in earlier cases, but it is still significantly higher than the usual legal interest rate used by courts for damages.

VI. How Do Courts Decide if 1.5% per Month Is Unconscionable?

There is no automatic answer. Courts look at both the rate itself and the surrounding circumstances. Some of the key factors:

1. Nature of the Transaction

Commercial or business loans
- Courts are more tolerant of higher rates, especially when:
  - The borrower is a business person,
  - The loan is used for profit-generating activity, and
  - Both parties are sophisticated.
Personal or consumption loans
- Courts are more protective if the borrower is an ordinary consumer, employee, or person in financial distress.

2. Bargaining Power & Voluntariness

Was the borrower:
- Desperate or under financial distress?
- Given a “take it or leave it” contract of adhesion with no real negotiation?
- A small borrower dealing with a large bank, financing or lending company?

Heavy imbalance in bargaining power may tilt the evaluation toward unconscionability, even at rates around 1.5% per month.

3. Combination with Other Charges

A 1.5% per month nominal interest rate alone may appear moderate compared to previously condemned rates. But look out for:

Service fees / processing fees / documentation fees deducted upfront
Penalties, e.g.:
- Additional 3% per month penalty on unpaid amounts
- Late payment fees per day/month
Default interest on top of regular interest

These can push the effective cost of credit much higher than 18–19% per year. Courts will look at the total economic burden, not just the label “1.5%.”

4. Industry Practice and Regulatory Environment

Courts may consider whether the rate is in line with prevailing market rates for that type of loan (e.g., credit card, small business financing).
If the BSP or another regulator has issued caps or benchmarks for similar products, a rate far above those caps can support a finding of unconscionability.

5. Behavior of the Parties

Did the lender harass the borrower, or behave abusively?
Was there misrepresentation, lack of proper disclosure, or hidden charges?
Did the borrower knowingly accept the rate and benefit substantially from the loan?

Courts often look not only at numbers but at the equities of the case.

VII. So, Is 1.5% Monthly Usurious or Exorbitant?

Putting everything together:

Not Usurious / Illegal Per Se
- Because Usury Law ceilings are suspended, 1.5% per month is not automatically usurious.
- There is no fixed statutory rule that “1.5% per month is illegal.”
Generally Within Tolerated Range in Many Cases
- Compared to interest rates previously condemned (e.g., 3%, 5.5%, 6% per month and higher), 1.5% per month is relatively moderate.
- In many commercial transactions, especially where:
  - The borrower and lender are both business entities,
  - The contract is clearly written, and
  - The loan is properly disclosed and freely agreed upon, courts have tended to uphold rates in the 1–2% per month range.
But It Can Still Be Found Unconscionable in Specific Circumstances Examples where 1.5% monthly might be treated as exorbitant:
- The borrower is a low-income worker or ordinary consumer, dealing with a standard-form, non-negotiable contract.
- The 1.5% interest is combined with multiple penalty charges, service fees, and compounding, so that the effective annual rate explodes.
- There is evidence of exploitation, abuse of financial distress, or lack of disclosure.
- The rate significantly exceeds caps or benchmarks under specific BSP regulations applicable to that particular credit product.
Practical Benchmarks (Conceptual, Not Hard Rules)
- Below ~2% per month, especially for business loans:
  - Often viewed as within the commercially tolerable range, though still subject to fairness review.
- Around 3% per month and above:
  - Courts have more often found such rates, especially combined with penalties, to be unconscionable, unless strong justifications exist.
- Extremely high rates (5%–10% per month or more):
  - Frequently branded as iniquitous and void.

VIII. Consequences if a 1.5% Monthly Rate Is Struck Down

If a court concludes that a 1.5% per month rate is unconscionable in a particular case, typical consequences are:

Principal Obligation Stands
- The borrower must still repay the principal loan amount.
Interest Stipulation is Void or Reduced
- The agreed rate (1.5% per month) is either:
  - Nullified entirely, and replaced with legal interest; or
  - Reduced to a reasonable rate determined by the court, often at or closer to legal interest.
Penalties and Additional Charges May Be Cancelled or Reduced
- Penalty interest, late charges, and similar exactions can also be reduced as iniquitous.
Possible Moral or Exemplary Damages
- In extreme cases involving bad faith or oppressive conduct, the court may award moral or exemplary damages, plus attorney’s fees.

IX. Practical Guidance for Lenders and Borrowers

1. For Lenders

Document clearly:
- Interest rate (e.g., “1.5% per month”),
- Whether it’s simple or compounded, and at what frequency,
- All fees, penalties, and default interest.
Avoid stacking charges that make the effective cost of credit outrageous.
Ensure transparency and proper disclosure (Truth in Lending Act compliance).
Avoid exploiting desperate or unsophisticated borrowers; this is exactly the situation courts are sensitive to.
Assume that if the effective rate looks shocking, a court may later cut it down.

2. For Borrowers

Always ask:
- Is the 1.5% per month:
  - the only charge, or are there fees, penalties, and compounding?
- What is the effective annual rate if everything is included?
Read and keep copies of:
- Loan agreements,
- Disclosure statements,
- Promissory notes,
- Receipts or statements of account.
If the combined charges feel grossly unfair, remember that courts may intervene even if you signed the agreement.
In disputes:
- Courts can strike down or reduce interest rates if you can show they are excessive, iniquitous, or unconscionable.

X. Conclusion

In the Philippine legal context, a 1.5% monthly interest rate:

Is not per se usurious or illegal, given the suspension of Usury Law ceilings and the principle of freedom to contract.
Is generally within the range that courts have tolerated, especially for commercial or business loans, provided it is properly disclosed and voluntarily agreed upon.
Can nevertheless be declared unconscionable or exorbitant where:
- It is combined with heavy penalties and fees,
- The effective burden is clearly oppressive, or
- The transaction exploits the borrower’s weakness and offends public policy.

Ultimately, whether 1.5% per month is “exorbitant” is a question of fact and equity, decided case by case, based on the totality of circumstances, not just the bare number printed in the contract.

For any specific loan or dispute, it is advisable to have the documents reviewed by a Philippine lawyer who can assess both the numerical rate and the overall context under the most recent jurisprudence and regulations.