Introduction

The proliferation of online lending applications (apps) in the Philippines has revolutionized access to credit, particularly for unbanked and underbanked populations. However, this growth has been marred by concerns over predatory practices, including exorbitant interest rates, hidden fees, and aggressive collection tactics. To address these issues, Philippine regulators have implemented measures to cap interest rates on loans extended through online platforms. These caps aim to protect borrowers from usurious charges while fostering a sustainable lending environment. Governed by a framework involving the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP), and relevant laws, the legal interest caps apply specifically to non-bank entities operating online lending platforms (OLPs). This article delves into the historical context, regulatory mechanisms, specific caps, enforcement, judicial interpretations, recent developments as of 2025, and implications for stakeholders, providing a comprehensive overview within the Philippine legal landscape.

Historical Context and Abolition of Usury

Prior to 1982, the Usury Law (Act No. 2655) imposed strict ceilings on interest rates, capping them at 12% per annum for secured loans and 14% for unsecured ones. Violations were criminalized, with penalties including fines and imprisonment. However, Central Bank Circular No. 905, Series of 1982, suspended these caps, effectively deregulating interest rates to align with market forces. This shift was intended to encourage lending amid economic challenges but led to unchecked rate hikes, especially in informal and online sectors.

In the absence of statutory usury limits, the Civil Code of the Philippines (Republic Act No. 386) provides recourse under Articles 1956 and 2209, allowing courts to deem rates "unconscionable" or "excessive" and reduce them accordingly. The Supreme Court has consistently ruled that rates exceeding 3% per month (36% annually) may be voided if they shock the conscience, as seen in landmark cases. This judicial oversight laid the groundwork for targeted regulations on online lending, where rates often reached 1-5% per day pre-regulation.

The rise of OLPs in the 2010s exacerbated issues, with apps offering quick, short-term loans at annual percentage rates (APRs) exceeding 100-500%. Reports of borrower harassment and debt traps prompted legislative and regulatory interventions, culminating in specific caps for this sector.

Regulatory Framework

Online lending apps are primarily regulated as lending companies (LCs) or financing companies (FCs) under the Lending Company Regulation Act of 2007 (Republic Act No. 9474) and the Financing Company Act (Republic Act No. 5980, as amended). The SEC oversees non-bank LCs and FCs, including their OLPs, requiring registration, capitalization, and compliance with operational guidelines. The BSP regulates bank-affiliated lenders and sets broader monetary policies, but defers to the SEC for non-banks.

Key issuances include:

SEC Memorandum Circular No. 19, Series of 2019: Mandates registration of OLPs, prohibits unfair collection practices, and requires transparent disclosure of loan terms, including effective interest rates (EIRs).
BSP Circular No. 1133, Series of 2021: Establishes ceilings on interest rates and fees for unsecured, general-purpose loans by LCs, FCs, and OLPs. This was a response to the COVID-19 pandemic's economic fallout, aiming to provide borrower relief.
SEC Memorandum Circular No. 3, Series of 2022: Implements BSP Circular No. 1133, enforcing caps and penalties for violations.

Additional laws like the Consumer Protection Act (Republic Act No. 7394) and the Data Privacy Act (Republic Act No. 10173) intersect, ensuring fair practices and data security in online lending.

Specific Interest Rate Caps

As of 2025, the following caps apply to online lending apps under SEC supervision, primarily for unsecured loans up to PHP 20,000 with terms of up to four months:

Nominal Interest Rate: Capped at 6% per month (approximately 0.2% per day or 72% per annum). This is the base rate charged on the principal.
Effective Interest Rate (EIR): Limited to 15% per month, inclusive of all fees, charges, and interest. The EIR accounts for compounding and additional costs, providing a holistic measure of borrowing expense.
Penalty Fees for Late Payments: Capped at 5% per month on the overdue amount.
Total Cost of Credit: The sum of interest, fees, and penalties cannot exceed predefined thresholds, ensuring affordability.

These caps do not apply to bank-issued credit cards, which are governed by BSP Circular No. 1098, Series of 2020, capping finance charges at 3% monthly (reduced from 24% annually in some contexts, but adjusted post-pandemic). Pawnshops and microfinance institutions may have separate limits under other regulations.

Exemptions exist for secured loans or those exceeding PHP 20,000, where market rates prevail, subject to unconscionability tests. OLPs must calculate and disclose EIR using the formula prescribed by the SEC, incorporating processing fees, insurance, and other add-ons.

Disclosure and Transparency Requirements

To prevent deceptive practices, OLPs must provide clear, pre-contract disclosures under SEC rules. This includes:

A detailed loan agreement outlining the principal, interest rate, EIR, fees, repayment schedule, and total cost.
Use of simple language, with translations if necessary, and electronic consent via verifiable means.
Prohibition on "fine print" or hidden charges; all terms must be prominently displayed in the app.

Non-compliance with disclosure can render the loan voidable, allowing borrowers to seek refunds or rate reductions.

Enforcement and Penalties

The SEC enforces caps through regular audits, complaint mechanisms, and moratoriums on non-compliant entities. As of 2025, a moratorium on new OLP registrations persists, with exceptions for compliant firms. Violations attract:

Administrative Fines: PHP 25,000 to PHP 100,000 per infraction, escalating for repeat offenses.
Suspension or Revocation: Of operating licenses, effectively shutting down the app.
Criminal Penalties: Under RA 9474, fines up to PHP 200,000 and imprisonment for up to six months for willful violations.

Borrowers can file complaints with the SEC's Enforcement and Investor Protection Department or pursue civil actions for damages. The Department of Trade and Industry (DTI) and the National Privacy Commission (NPC) may also intervene for consumer and data issues.

Judicial Interpretations and Case Law

The Supreme Court plays a pivotal role in interpreting caps. In Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, January 15, 2013), the Court affirmed the deregulation but emphasized judicial power to strike down excessive rates. More recently, a 2024 ruling deemed 3% monthly rates unconscionable for short-term loans, influencing 2025 proposals. Cases like those involving Digido or Cashalo have resulted in rate reductions and refunds, setting precedents for OLP accountability.

Recent Developments as of 2025

In October 2025, the SEC released a draft circular proposing tighter caps, fixing nominal rates at 6% monthly for small loans and inviting public comments until early 2026. This follows Senate proposals, such as those by Senator Zubiri, advocating for legislative caps amid rising complaints. The BSP continues to monitor data to justify further adjustments, noting average rates around 47% for credit cards. Additionally, fintech innovations like open finance under BSP Circular No. 1205 have lifted digital bank moratoriums, potentially increasing competition and lowering rates organically.

Challenges persist, including evasion through offshore apps or disguised fees. Advocacy groups push for a return to usury laws, while lenders argue caps could restrict credit access.

Implications for Borrowers and Lenders

For borrowers, caps provide protection against debt spirals, promoting financial literacy and inclusion. Lenders must adapt by improving risk assessment and efficiency to maintain profitability. Compliance enhances legitimacy, attracting investments in the fintech sector.

Conclusion

The legal interest caps on online lending apps in the Philippines represent a balanced approach to consumer protection and market viability. Rooted in post-usury deregulation and refined through targeted regulations like BSP Circular No. 1133 and SEC issuances, these measures curb predatory lending while allowing innovation. As of 2025, ongoing reforms underscore the dynamic nature of this field. Stakeholders should stay informed through official channels and consult legal experts for case-specific advice to navigate this evolving landscape effectively.