Is a High Interest Rate on Loans Legal in the Philippines?

Quick note: This is general information, not legal advice. If you’re facing a specific loan dispute, consult a Philippine lawyer.

The Short Answer

There’s no fixed interest-rate ceiling for most private loans in the Philippines. Statutory “usury” caps were suspended in 1982 (not repealed), so parties generally may agree on any rate.
But even agreed rates can be struck down or reduced by courts if they’re “iniquitous” or “unconscionable.” Filipino jurisprudence is rich with cases where monthly rates (e.g., 3%–6% per month) and steep penalties were cut down.
Special rules/caps exist in some sectors (e.g., credit cards) and public-policy guardrails apply (consumer protection, abusive collection bans, disclosure rules).
If no written agreement on interest exists, no interest is due under the Civil Code—unless and until legal interest applies by reason of default or judgment.

The Legal Framework

1) Usury Law & Its Suspension

Act No. 2655 (Usury Law) historically capped interest but Monetary Board Circular No. 905 (1982) suspended those ceilings.
Effect: No hard cap for most loans, but courts retain equitable power to curb excessive interest.

2) Civil Code Anchors

Freedom to contract (Art. 1306)—limited by law, morals, good customs, public order, and public policy.
Interest must be in writing (Art. 1956). If interest isn’t expressly stipulated in writing, none is due (separate from damages or legal interest).
Abuse of rights (Art. 19–21)—sanctions bad faith or oppressive conduct.
Penalty reduction (Arts. 1229 & 2227)—courts may reduce iniquitous or unconscionable penalties/liquidated damages.

3) Legal Interest (When There’s No Agreed Rate—or After Default/Judgment)

Legal interest (the default statutory rate used by courts) is 6% per annum (following jurisprudence that updated the earlier 12%).
Key points you’ll often see in decisions:
- Loans/forbearance of money: If the stipulated rate is void/unconscionable or absent, courts may impose 6% p.a. from judicial or extrajudicial demand or from default, depending on the facts.
- Judgments: Money awards generally earn 6% p.a. from finality of judgment until full satisfaction.

Practical upshot: A lender who didn’t put interest in writing can’t later claim a high conventional rate; at best, legal interest may apply upon default or judgment.

What Counts as “Unconscionable”?

Because there’s no fixed cap, “unconscionable” is a case-by-case judicial call. However, patterns have emerged:

Very high monthly rates (e.g., 3%–6% per month or higher) have frequently been struck down or reduced by the Supreme Court and the Court of Appeals, especially when piled together with:
- steep penalty charges (another 3%–5% per month),
- compounded interest without transparency,
- or hidden finance charges.
Courts often reform the rate to something moderate (historically, decisions referenced 12% p.a. in earlier eras; modern cases commonly move to 6% p.a. legal interest for the appropriate periods), and slash penalties to reasonable levels.

Indicators of unconscionability include: lack of true negotiation, imbalance of bargaining power, extreme effective annual percentage rates (APR), hidden or duplicative charges, and oppressive collection behavior.

Penalties, Fees, and “Add-Ons”

Penalty interest (for late payment) is separate from regular interest and may be reduced if excessive.
Service fees, processing fees, collection charges, and “notarial” or “facilitation” fees are scrutinized. Courts and regulators are wary of stacking charges that inflate the effective interest rate or mislead borrowers.

Sector-Specific & Regulatory Guardrails

Even with the usury ceilings suspended, regulators and newer laws add consumer-protection constraints:

Truth in Lending Act (R.A. 3765): Lenders must clearly disclose the true cost of borrowing (finance charges, effective yield). Hidden or inaccurate disclosures can lead to civil/criminal liability and can influence courts’ unconscionability analysis.
Financial Consumer Protection Act (R.A. 11765, 2022): Empowers the BSP, SEC, and IC to police abusive, unfair, deceptive financial practices; bolster dispute mechanisms; and issue standards on pricing/charges.
Lending Company Regulation Act (R.A. 9474) & Financing Company Act (as amended): Require licensing/registration, governance, and compliance; operating without authority is penalized.
Anti-abusive collection rules (e.g., SEC circulars for lending/financing companies; BSP standards for supervised financial institutions): Prohibit harassment, doxxing, public shaming, or privacy-violating tactics—common issues with some online lenders.
Credit-card caps: Unlike most private loans, credit cards are subject to regulator-set ceilings on interest and certain fees (the exact cap changes by circular; check the current BSP circular in force at the time of your dispute).

If your loan involves a bank, pawnshop, microfinance, or credit card, institution-specific rules may apply (e.g., disclosure templates, fee caps, computation standards).

How Courts Typically Resolve “High-Rate” Disputes

Validate the agreement: Is there a written stipulation on interest? On penalties? On compounding?
Assess reasonableness: Examine the rate level, effective APR, and total burden (interest + penalties + fees).
Trim the excess:
- Strike or reduce the conventional rate if unconscionable.
- Reduce penalty interest to a reasonable level (or align with the main rate).
- Disallow duplicated or disguised charges.
Apply legal interest:
- Where appropriate, 6% p.a. from default/demand or from judgment until paid.
Consider equity & conduct: Bad-faith lender behavior (harassment, concealment, bait-and-switch) weighs against enforcing harsh terms.

Practical Guidance for Borrowers

Gather documents: Promissory notes, disclosure statements, receipts, billing histories, texts/emails, app screenshots (for online loans), demand letters.
Compute the effective rate (APR): Add interest, penalties, and fees. Courts care about effective cost, not just the headline rate.
Check disclosures: Missing or misleading disclosures are powerful evidence.
Document collection abuse: Keep logs and screenshots; these support damages or regulatory complaints.
Regulatory recourse:
- BSP (for banks, credit cards, pawnshops, e-money and other BSP-supervised entities),
- SEC (for lending/financing companies and many online lenders),
- DTI/NPC for consumer/data-privacy angles,
- IC for insurance-linked credit products.
Court options: File an action to annul or reform the interest clauses, reduce penalties, and settle the account under legal interest. Courts can also invalidate abusive provisions.

Practical Guidance for Lenders

Put interest in writing and be clear about: rate basis (per annum), whether simple or compounded, compounding frequency, penalties (rate and trigger), and all fees.
Avoid “stacking”: Excessive monthly rates + compounding + heavy penalties + multiple fees invite a finding of unconscionability.
Follow disclosure templates and keep signed acknowledgments.
Train collectors: Strictly comply with anti-harassment and privacy rules.
Calibrate to jurisprudence: Conservative, transparent pricing is far more enforceable than headline-grabbing monthly rates.

Frequently Asked Questions

1) If the borrower signed, is any rate enforceable? No. Consent doesn’t save unconscionable rates or iniquitous penalties. Courts can reduce them.

2) If no interest is written, can the lender still collect interest? Not conventional interest. But legal interest (6% p.a.) can run from default or judgment, depending on the case.

3) Are late-payment penalties separate from interest? Yes—and they’re often reduced if high. Courts look at the overall burden.

4) Can compounding be applied automatically? Only if clearly stipulated and properly disclosed. Hidden compounding is a red flag.

5) What about online lending apps with “daily” rates? Daily or weekly quotes that balloon the effective APR draw scrutiny, especially if disclosures are unclear or collection is abusive. Regulatory complaints and court challenges routinely succeed against abusive structures.

A Simple Compliance Checklist

For a defensible loan contract in the Philippines:

Interest: Clear, per-annum rate, in writing.
Fees: Itemized and reasonable.
Penalties: Modest, capped (avoid double-digit monthly).
Compounding: Expressly stated (if any) with frequency.
Disclosure: Provide standardized truth-in-lending statements showing effective cost.
Collections: No harassment, no privacy violations.
Records: Keep signed copies; deliver borrower’s copies.

Bottom Line

High interest can be legal in the Philippines if it’s clearly written, transparently disclosed, and reasonable in light of public policy. Courts routinely invalidate or cut down exorbitant rates and punitive penalties. If you’re confronting a high-interest loan—whether as borrower or lender—the winning strategy is documentation, transparency, and reasonableness, backed by the Civil Code, consumer-protection laws, and modern jurisprudence.