The rapid expansion of Fintech in the Philippines has made credit more accessible than ever. However, the convenience of "Buy Now, Pay Later" (BNPL) and digital lending apps comes with stringent contractual obligations. When a borrower misses a deadline, they often face a dual burden: Late Payment Interest and Penalties.
Understanding the legal landscape surrounding these charges is crucial for every Filipino consumer to avoid a spiral of debt.
1. Legal Basis and Regulatory Oversight
Consumer credit apps, depending on their corporate structure, generally fall under the jurisdiction of two primary regulators:
- Securities and Exchange Commission (SEC): Governs Financing Companies (FCs) and Lending Companies (LCs).
- Bangko Sentral ng Pilipinas (BSP): Governs banks and digital banks that offer credit lines through apps.
All these entities must comply with the Truth in Lending Act (Republic Act No. 3765). This law mandates full disclosure of the cost of credit, including specific details on late payment charges, before the consummation of the transaction.
2. Interest vs. Penalties: The Distinction
While often lumped together, these are legally distinct concepts under the Philippine Civil Code:
- Late Payment Interest (Moratory Interest): This is the cost of using the money beyond the agreed period. It serves as "rent" for the continued use of the principal.
- Penalty Charges (Liquidated Damages): Governed by Article 1226 of the Civil Code, a penalty clause is an accessory obligation intended to punish the breach of contract and compensate the lender for the administrative costs of collection.
Note: Under Philippine law, a penalty clause generally substitutes the indemnity for damages and the payment of interests in case of non-compliance, unless there is a specific stipulation that both interest and penalty shall be paid. Most app contracts explicitly state that both will apply.
3. Are there "Ceilings" on Charges?
For a long time, the Philippines had no "usury" law, meaning lenders could theoretically charge any interest rate agreed upon. However, recent regulations have changed the game for small-value loans:
SEC Memorandum Circular No. 3 (Series of 2022)
In collaboration with the BSP, the SEC imposed a cap on interest and fees for short-term, small-value consumer loans (often referred to as "Payday Loans" or "Micro-loans"):
- Nominal Interest Rate: Capped at 6% per month (approx. 0.2% per day).
- Late Payment Penalties: Capped at 1% per month of the outstanding amount.
- Total Cost of Credit: The sum of all interest, fees, and penalties cannot exceed 100% of the total amount borrowed. This prevents the "debt trap" where a small loan balloons into a life-altering debt.
4. The "Unconscionable" Doctrine
Even if a loan falls outside the specific caps of SEC MC No. 3, the Supreme Court of the Philippines has consistently ruled that interest rates and penalties that are "excessive, iniquitous, unconscionable, and exorbitant" are void.
While "unconscionable" is subjective, the Court has frequently struck down interest rates of 3% per month (36% per annum) or higher in non-micro-loan contexts, reducing them to the prevailing legal rate (currently 6% per annum for liquidated damages/defaults).
5. Disclosure Requirements
Under the Truth in Lending Act, the app must provide a Disclosure Statement that clearly outlines:
- The cash price/amount borrowed.
- Any down payment or credits.
- Itemized fees (service fees, processing fees).
- The specific late payment charges and how they are computed.
Failure to provide this information clearly before the loan is accepted can be used as a defense to avoid paying the penalties entirely.
6. Common Practices and Red Flags
- Daily Accumulation: Many apps calculate penalties daily rather than monthly to accelerate the debt growth.
- Compounding: Check if the app practices "Negative Amortization," where unpaid interest is added to the principal, which then earns more interest (Interest on Interest). This must be expressly stipulated in writing.
- Pre-computed Penalties: Some apps deduct "pre-paid" interest or fees upfront, which effectively increases the "Effective Interest Rate" (EIR).
Summary Table: Consumer Protection Rights
| Feature | Legal Protection |
|---|---|
| Transparency | Must be disclosed in a Disclosure Statement before clicking "Accept." |
| Micro-loan Caps | 6% monthly interest / 1% monthly penalty (for specific small loans). |
| Total Debt Cap | Total costs cannot exceed 100% of the principal (for specific small loans). |
| Judicial Relief | Courts can reduce penalties if they are found "unconscionable." |
Next Steps
If you believe a credit app is charging illegal or undisclosed penalties, you can file a formal complaint with the SEC's Corporate Governance and Finance Department (CGFD) or the BSP's Consumer Protection and Market Conduct Office.
Would you like me to draft a formal demand letter or a complaint template addressed to a lending company regarding excessive charges?