(Philippine legal article for general information only — not a substitute for advice from a licensed Philippine lawyer.)

1. Overview: Is “Usury” Still a Thing in the Philippines?

Historically, the Philippines had strict “usury laws” that capped interest rates. These were found in the Usury Law (Act No. 2655, as amended).

However, interest rate ceilings were effectively lifted when the Central Bank (now BSP) suspended the Usury Law ceilings through Central Bank Circular No. 905 (1982). In practice:

There is no longer a fixed statutory cap on interest for most loans.
Parties are generally free to stipulate interest rates under the principle of contractual autonomy.
Courts can still strike down excessive interest as “unconscionable,” contrary to morals, or against public policy.

So, usury as a criminal/automatic cap regime is largely dormant, but judicial control over unfair interest is very alive.

2. The Legal Framework Today

2.1. Civil Code Provisions

Even without statutory ceilings, the Civil Code governs interest:

Interest must be expressly agreed upon. If the loan contract does not clearly state an interest rate, no interest is due (except in some forms of damages or delay).
Interest agreement must be in writing. Under Article 1956, Civil Code, interest is not demandable unless stipulated in writing.
No interest-on-interest unless allowed. Compound interest (anatocism) is generally not allowed unless:
1. there is a written stipulation, or
2. interest is judicially demanded, or
3. the borrower is in delay and the interest has become due (with court standards applying).

2.2. BSP Circular No. 905 (1982)

This circular removed interest ceilings, stating that interest rates shall not be subject to any ceiling prescribed by the Usury Law.

Effect: Interest rates are deregulated, but still subject to court review and consumer protection laws.

2.3. Special Consumer and Lending Laws

Several statutes regulate lending behavior even if they don’t set universal caps:

Truth in Lending Act (R.A. 3765) Requires full disclosure of finance charges and effective interest rates. Nondisclosure can make charges unenforceable and expose lenders to liability.
Consumer Act of the Philippines (R.A. 7394) Broad consumer protection against unfair or deceptive practices.
Lending Company Regulation Act (R.A. 9474) and Financing Company Act (R.A. 8556) Require registration and compliance with disclosure rules; BSP/SEC can penalize abusive terms.
R.A. 8791 (General Banking Law) and BSP rules Govern banks’ lending, disclosures, and fair dealing.

3. What Counts as “Interest” in Philippine Law?

Interest is compensation for the use of money. But lenders sometimes label charges differently. Courts look at substance over form.

May be treated as interest if it effectively increases the cost of borrowing:

“Service fees”
“Processing fees”
“Add-on rates”
“Penalties that function like interest”
“Discounting schemes” that inflate repayment beyond principal

Bottom line: If a fee is really the price of credit, courts may treat it as interest and test it for fairness.

4. Unconscionable Interest: The Modern “Usury” Doctrine

Even without caps, Philippine courts will reduce or nullify interest when it is:

Unconscionable
Iniquitous
Excessive
Shocking to the conscience
Contrary to morals or public policy

4.1. How Courts Decide Unconscionability

There’s no single numeric ceiling. Courts weigh:

Prevailing market rates
Borrower’s vulnerability or bargaining position
Nature of the transaction (consumer vs. commercial)
Presence of fraud, coercion, or hidden charges
Total effective cost, not just nominal rate

4.2. Typical Judicial Outcomes

When interest is found unconscionable, courts may:

Reduce the interest to a reasonable rate
Declare the interest void and allow only principal
Modify penalty clauses
Apply legal interest rates instead

5. Legal Interest Rates (When No Valid Rate Applies)

When parties did not validly agree on interest, or when the agreed rate is void, courts often apply legal interest. The Supreme Court (notably in Nacar v. Gallery Frames and related cases) established a structure:

6% per annum is the general legal interest rate for loans or forbearance of money, goods, or credits when interest is due but not properly stipulated, and for judgments involving such obligations.
Courts apply 6% interest on judgments from finality until full payment.

This 6% is now the standard baseline unless BSP changes the legal interest via circulars (and courts follow).

6. Penalty Interest and Liquidated Damages

Loan contracts often include:

Regular interest
Penalty interest
Liquidated damages
Attorney’s fees

Courts review these collectively for fairness.

Key principles:

Penalty interest can be reduced if excessive.
Double penalties (e.g., penalty interest + high liquidated damages) may be cut down.
Attorney’s fees must be reasonable and cannot be a disguised penalty.

7. Compound Interest (Anatocism)

7.1. General Rule

Interest does not earn interest unless:

There is a written agreement allowing compounding, or
The interest is judicially demanded, after which interest on interest may run.

7.2. Court Scrutiny

Even if stipulated, compounding clauses can still be struck down if they create an unconscionable burden.

8. Differences by Type of Loan

8.1. Bank Loans

Banks can set rates freely but must comply with BSP and disclosure rules. Courts still reduce unconscionable bank interest, though banks often enjoy a presumption of regularity if disclosures are proper.

8.2. Lending/Financing Companies

Heavily regulated by SEC/BSP rules. Disclosure is critical. Hidden charges or misleading add-on rates are vulnerable to invalidation.

8.3. Pawnshops

Governed by special rules and BSP/SEC regulations. They may have specific administrative caps or rate guidelines depending on regulation, and disclosures must be clear.

8.4. Informal/Private Loans

Still enforceable if written and not illegal, but courts are more willing to protect borrowers if:

There was exploitation, or
Terms are shocking relative to the borrower’s situation.

9. Common Risk Clauses That Get Struck Down

Borrowers often challenge:

Very high monthly interest (especially if out of line with market).
Penalty interest equal to or higher than regular interest.
Add-on interest methods that inflate true annual rates.
Unilateral escalation clauses letting the lender raise rates without borrower consent.
- Courts typically require that escalation clauses be:
  - Mutual
  - Based on a valid, external standard
  - With proper notice and borrower’s right to prepay/terminate.
Confusing or hidden finance charges violating the Truth in Lending Act.

10. Criminal Liability: Is Usury a Crime Again?

Because ceilings are suspended, charging high interest is not automatically criminal usury.

But lenders can incur criminal or administrative liability under other laws if they:

Use threats, harassment, or violence in collection
Commit fraud or misrepresentation
Violate data privacy or cybercrime laws (common in abusive online lending)
Operate without a license (if required)

So the legal danger today usually comes from how lending is done, not merely the numeric rate.

11. If You’re a Borrower: Practical Legal Steps

Check if interest is in writing.
- If not, you can argue no interest is due.
Compute the effective annual rate.
- Include “fees” that are actually finance charges.
Assess market comparability.
- If your rate is far above normal commercial rates, it strengthens unconscionability arguments.
Look for escalation or penalty stacking.
- These are common grounds for reduction.
Invoke disclosure violations.
- If the lender failed to disclose the true cost of credit, charges can be void.
Court remedy.
- You can ask the court to:
  - reduce interest,
  - nullify penalties, and
  - apply legal interest instead.

12. If You’re a Lender: How to Keep Rates Enforceable

Put interest clearly in writing.
- Include nominal and effective rates.
Disclose everything required.
- Especially total finance charges and repayment schedule.
Keep rates defensible.
- Anchor them to market realities and risk factors.
Avoid oppressive penalties.
- Courts dislike “interest + penalty + damages” piling up to extreme totals.
Use fair escalation clauses.
- Mutuality and objective basis are key.

13. Key Takeaways

No fixed interest ceilings apply generally because BSP suspended Usury Law caps.
Interest must be in writing or it is not collectible.
Courts can reduce or void unconscionable interest and penalties.
When no valid interest applies, courts usually impose 6% legal interest per annum.
Disclosure failures are a powerful basis to defeat excessive charges.
Lending methods that involve abuse can trigger liability even if rates are “agreed.”

14. Final Note

Philippine law today balances freedom of contract with strong judicial and consumer protection against abusive lending. If your situation involves a specific contract, rate structure, or collection behavior, a lawyer can assess enforceability and compute what a court is likely to allow.