Usury, Interest Caps, and Remedies (Philippine context)

Bottom line up front

There is no general statutory ceiling on loan interest in the Philippines because the Monetary Board suspended the Usury Law’s interest rate ceilings in 1982 (CB Circular No. 905).
However, courts routinely strike down “unconscionable” rates—especially those that are monthly, very high, or combined with heavy penalties. Rates like 30% per month (≈360% per year) have repeatedly been voided or reduced by the courts as contrary to morals, good customs, and public policy.
Some sectors do have caps (e.g., credit cards; certain small-value, short-term loans regulated by the SEC; pawnshops under BSP rules).
Even when interest is freely stipulable, it must be in writing (Civil Code art. 1956), and penalties and compounding are subject to judicial reduction if iniquitous (arts. 1229, 2227).

Legal framework

1) The Usury Law and its suspension

Act No. 2655 (Usury Law) remains on the books but its cap provisions are suspended, not repealed.
Practical effect: Parties may agree on interest rates in loans/forbearance subject to the Civil Code, special regulations, and judicial scrutiny for unconscionability.

2) Freedom to stipulate vs. unconscionability

Civil Code art. 1306 allows parties to set terms that are not contrary to law, morals, good customs, public order, or public policy.
The Supreme Court has invalidated or reduced interest where the rate was excessive, iniquitous, or unconscionable (e.g., Medel v. CA, G.R. No. 131622, 27 Nov 1998; many later cases following its rationale).
Courts look at totality: nominal rate, whether it’s monthly, presence of penalties, compounding (“interest on interest”), the parties’ relative bargaining power, and commercial realities.
Typical outcomes: courts nullify the agreed rate and substitute legal interest or reduce the rate to a reasonable level.

3) Formal requirements and default rules

Written stipulation required: No interest may be collected unless expressly stipulated in writing (Civil Code art. 1956).
Legal interest (court-imposed interest when none is validly agreed, or as damages): the Supreme Court has pegged 6% per annum as the prevailing legal rate (see Nacar v. Gallery Frames, G.R. No. 189871, 13 Aug 2013, and subsequent cases).
No automatic compounding: Interest does not earn interest unless expressly agreed and not otherwise prohibited; even then, courts may rein in abusive compounding.
Penalties/liquidated damages: Courts may reduce penalties that are “iniquitous or unconscionable” (Civil Code arts. 1229, 2227).

Is 30% per month enforceable?

Short answer: Almost always no.

30% monthly = 360% per year (simple). Philippine courts have routinely voided or reduced rates far below this threshold, including 3%–7% per month (36%–84% p.a.), especially when paired with penalties, add-on fees, or compounding.
When the stipulated rate is voided for unconscionability, courts commonly:
1. Strike down the abusive rate;
2. Apply 6% per annum (legal interest) from default or from filing of the complaint/judicial demand, or fix a reasonable rate in lieu of the void provision; and
3. Reduce penalties to equitable amounts.

Practical implication: A lender demanding 30% a month risks having the rate invalidated, penalties slashed, and recovery limited to principal + reasonable/ legal interest, sometimes with the lender ordered to refund excess payments.

Sector-specific caps and rules (where a monthly 30% would be unlawful)

Even though there’s no general cap, regulators have imposed specific ceilings in targeted markets. Illustrative examples:

Credit cards (BSP-regulated): The Bangko Sentral has imposed a monthly finance charge cap (and caps on certain fees). A 30% monthly finance charge violates these caps.
Covered small-value, short-term loans (SEC-regulated): The SEC has issued interest-rate and total cost caps for certain lending/financing companies on small, short-term, non-bank loans. A 30% monthly rate will generally exceed those caps.
Pawnshops (BSP-regulated under P.D. 114 and BSP circulars): Pawnshop interest and charges are regulated; a straight 30% monthly rate would violate prevailing limits.
Microfinance and special credit programs: Applicable guidelines typically cap or condition charges; 30% monthly would not pass muster.

Note: Exact numerical caps and administrative circular numbers change from time to time. Always check the most recent BSP/SEC circulars for the product involved.

Common lender practices that trigger court intervention

Layering a high monthly rate with “penalty interest,” “service charges,” and “processing fees,” resulting in an effective rate far beyond the nominal.
Compounding without clear written basis, or compounding at short intervals (e.g., monthly or even daily) that explode the effective rate.
“Interest on interest” after maturity without express agreement, or in addition to high penalty charges.
Harassing collection practices (threats, shaming, unauthorized contact scraping) — these can violate SEC rules and data privacy laws, inviting separate penalties.
Non-compliance with disclosure rules under the Truth in Lending Act (R.A. 3765) and implementing regulations (e.g., failing to show the effective interest rate and all finance charges).

If you’re a borrower facing 30% per month

Immediate defenses and strategies

Invoke unconscionability. Argue the stipulated rate (and penalties) are iniquitous; cite jurisprudence striking down monthly double-digit rates.
Question compounding and penalties. Demand proof of a clear written stipulation and seek judicial reduction of penalties (arts. 1229, 2227).
Audit the effective rate. Calculate APR/EIR with all fees included; courts and regulators look at total cost of credit, not just the nominal rate.
Compliance checks.
- Is the lender a registered lending/financing company (R.A. 9474; R.A. 8556)?
- For card issuers/pawnshops, do the BSP caps apply?
- For small-value, short-term consumer loans, do the SEC caps apply?
- Were Truth in Lending disclosures provided?
Evidence preservation. Keep all contracts, receipts, screenshots, messages, and call logs (important for SEC complaints and civil/criminal cases).

Remedies

Defend or file suit to annul or reform the interest clause; ask the court to apply legal interest (6% p.a.) or a reasonable rate, and reduce penalties.
Regulatory complaints:
- SEC (lending/financing companies; abusive collection practices).
- BSP (banks, credit cards, pawnshops).
- DTI (consumer protection, where applicable).
- NPC (Data Privacy Act violations).
Criminal avenues may exist for unregistered lending, harassment, or other special laws (not “usury” per se, since the cap is suspended).

If you’re a lender

Register and comply (SEC for lending/financing companies; BSP for banks/pawnshops/card issuers).
Know the caps that apply to your product segment; do not exceed them.
Disclose clearly (nominal rate, EIR/APR, fees, penalties, compounding method).
Avoid iniquitous terms: keep penalty rates modest, avoid stacking penalty interest on top of high contracted interest, and be cautious with monthly rates (courts scrutinize these).
Collection practices: adopt policies consistent with SEC guidance and data privacy rules; no shaming or threats.

Frequently asked questions

1) If the borrower signed the contract, is 30% per month automatically enforceable? No. Courts can and do strike down unconscionable interest and reduce penalties, notwithstanding consent.

2) Can parties agree to compound interest monthly? They can stipulate, but courts may disallow or temper compounding if it leads to iniquitous results or lacks clear written basis.

3) If the rate is voided, what applies? Typically 6% per annum as legal interest from default or judicial demand, or a reasonable rate set by the court, with penalties reduced if excessive.

4) Does “no usury” mean no rules? No. You remain bound by Civil Code standards, consumer protection, Truth in Lending, data privacy, and sector-specific caps.

Practical checklist (borrower or lender)

Identify the product (bank loan, credit card, pawnshop, payday/small-value loan, secured personal loan, corporate loan).
Check sectoral caps (BSP/SEC) and the latest circulars for that product.
Confirm written stipulations (interest, penalties, compounding).
Compute the EIR/APR including all fees.
Screen for unconscionability (very high monthly rate; stacked penalties; aggressive compounding).
Ensure compliant collections and data privacy practices.
Document everything (contracts, statements, communications).

Takeaway

General rule: No across-the-board statutory ceiling due to the suspension of usury caps.
Key guardrails: Unconscionability doctrine, written stipulation, and sector-specific caps/regulations.
Applied to 30% per month: In Philippine courts and under current regulatory regimes, a 30% monthly interest rate is virtually certain to be struck down (or illegal where a sector cap applies).
Best course: Price within regulatory caps, ensure transparent disclosures, and avoid layered charges that push the effective rate into iniquitous territory.

This article provides general information on Philippine law. For a specific case or contract, consult Philippine counsel and verify the most recent BSP/SEC issuances and Supreme Court decisions.