Legal Interest Rate Caps for Private-Money Loans in the Philippines
A comprehensive 2025 primer for lawyers, lenders, and borrowers
1. Foundations of Philippine Interest-Rate Regulation
| Source of law | Key provision for interest | Present status |
|---|---|---|
| Civil Code (1950) Art. 1956, 2209–2213 |
• Interest must be express and in writing. • “Legal interest” applies when none is stipulated. |
In force |
| Usury Law—Act No. 2655 (1916) | Fixed ceilings ranging from 6 % to 24 % p.a. | Ceiling suspended by CB Circular 905 (1982); law itself still exists and is invoked against unconscionable rates. |
| Central Bank/Bangko Sentral ng Pilipinas (BSP) | • CB Circular 416 (1974) set 12 % p.a. legal rate on “loan or forbearance of money.” • BSP Circular 799 (2013) cut the legal rate to 6 % p.a. |
Governs court-awarded interest and contracts without an agreed rate. |
| SEC Memorandum Circular No. 3-2022 | Caps on small loans ≤ ₱10,000, tenor ≤ 4 months granted by lending/financing companies: • Nominal rate ≤ 6 % per month (72 % p.a.) • Effective interest rate ≤ 15 % per month • Penalty charges ≤ 5 % per month on any amount due |
In force since 03 March 2022; renewed yearly (last extension: SEC MC 1-2024). |
| BSP credit-card cap (MB Res. 1682 s. 2020, renewed 2024) | Interest/finance charge on credit-card receivables ≤ 2 % per month (24 % p.a.) | Applies to banks/credit-card issuers, not to private lenders. |
2. Evolution of the “Legal Interest” Rate
Pre-1982 Usury Era – The Usury Law ceilings were mandatory; charging more was a criminal offense.
CB Circular 905 (Dec 1982) – “There shall be no more ceilings on interest rates” ➔ contractual freedom, but subject to public policy.
Jurisprudential Check-and-Balance – Even without ceilings, courts invalidate rates that are “excessive, iniquitous, unconscionable or exorbitant.”
BSP Circular 799 (July 2013) – Lowered the default or legal rate from 12 % to 6 % per annum to align with economic conditions. This rate is now standard for:
- Loans/forbearance without a stipulated rate;
- Judicial interest awarded by courts (from filing of complaint or judgment, depending on the cause of action).
3. How Courts Police “Unconscionable” Interest
Since 1998, the Supreme Court has built a consistent line of decisions trimming interest on private loans:
| Case (Year) | Contract rate | Court action | Rationale |
|---|---|---|---|
| Medel v. CA (1998) | 5 % per month (60 % p.a.) | Reduced to 12 % p.a. | 60 % is “shocking to the conscience”. |
| Reformina v. CA (1991) | 6 % p.m. | Cut to 12 % p.a. | Long-term credit burden on borrower. |
| Castro v. Tan (2008) | 7 % p.m. | Down to 12 % p.a. | Parties may agree freely, but not to oppression. |
| Spouses Abella v. Spouses Abella (2014) | 3 % p.m. compounded | Reduced to 12 % p.a. simple | Compounding at high rates = unjust enrichment. |
| Security Bank v. Spouses Romeo A. Lobao (2020) | 4 % p.m. | Lowered to 6 % p.a. (BSP Circular 799) | After 2013, benchmark is 6 % p.a. |
Guiding factors the Court weighs
- Disparity with prevailing market rates.
- Whether borrower is a consenting business entity or an individual in dire need.
- Presence of compounding or “interest‐on-interest”.
- Total cost of credit versus principal (e.g., interest overtakes principal several times over).
When a rate is struck down the Court normally:
(1) Deletes the stipulated rate;
(2) Imposes 6 % p.a. simple interest from date of demand or filing;
(3) Applies the same 6 % p.a. to the judgment award until full payment.4. Statutory Caps for Specific Lending Segments
| Segment | Governing rule | Maximum charges |
|---|---|---|
| Lending & financing companies, “online lending apps” | SEC MC 3-2022 | Nominal ≤ 6 % p.m.; EIR ≤ 15 % p.m.; penalty ≤ 5 % p.m. |
| Pawnshops | BSP Circular 938-2017 & Manual of Regs. for Non-Bank Fin’l Insts. | Service fee + interest effectively ≈ 3 % – 5 % p.m.; must be disclosed in Contract of Loan. |
| Credit cards | BSP Res. 1682-2020 (cap renewed 2024) | 2 % p.m. on unpaid balance; cash-advance fee ≤ ₱200. |
| Microfinance loans (≤ ₱150,000, cooperative-style) | No explicit cap, but must follow the microfinance cost formula (interest + service charge ≤ 2–3 % p.m.). | |
| Peer-to-peer / crowdfunding portals | Registered as financing companies ➔ follow SEC caps if the loan falls within scope; otherwise, unconscionability test applies. |
Outside these regulated niches, there is still no blanket statutory ceiling. The operative restraint is the unconscionability doctrine backed by Art. 1229 (Civil Code) and public-policy police power.
5. Formal Requirements for Charging Interest
- Written stipulation – Art. 1956: “No interest shall be due unless it has been expressly stipulated in writing.”
- Clarity of rate and mode – State if it is per annum or per month, and whether simple or compounded. Ambiguity is construed against the lender (Art. 1377).
- Disclosure of Effective Interest Rate (EIR) – Truth in Lending Act (RA 3765) & BSP Circular 730-2011 require disclosure of the EIR, not just the nominal rate, for loans by banks, quasi-banks, and financing/lending companies.
- Data-privacy compliant collection – The SEC now frequently suspends/ revokes lending-app licenses for abusive collection and unexplained charges.
6. Penalties, Damages & Criminal Exposure
- Civil – Excessive interest may be (a) reduced to 6 % p.a., and (b) any payments beyond the lawful amount applied to the principal or refunded (Art. 1422, 1390).
- Criminal – Usurious lending is no longer criminal per se, but lending companies operating without SEC registration or charging hidden fees > 5 % p.m. risk prosecution under RA 9474 & SEC MC 3-2022.
- Administrative – SEC may fine up to ₱1 million + ₱10,000/day of continuing violation, suspend operations, and order refund to borrowers.
7. Practical Drafting & Compliance Tips (2025)
| For Private Lenders | For Borrowers |
|---|---|
| • Keep rates ≤ 3 % p.m. simple to stay well within jurisprudential comfort-zone. • State rate per annum (e.g., “36 % p.a.”) then show monthly peso equivalent. • Avoid compounding unless borrower is a business entity and agrees in a separate clause. • Provide a Truth-in-Lending Statement even if not a company. |
• Check that the loan contract shows the EIR and total peso cost over the term. • Ask the lender to initial the disclosure sheet. • If total interest + penalties > principal, you likely have grounds to have it reduced. • Keep proof of all payments; courts apply them first to interest, then principal unless agreed otherwise. |
8. Frequently-Asked Questions
| Question | Short answer |
|---|---|
| Is there a single national cap for all private loans? | No. Outside the SEC-capped micro-loans and credit-card caps, Philippine law relies on the courts to police unconscionable rates. |
| Can parties agree on 10 % per month? | They can sign it, but a court will almost certainly cut it down to 6 % p.a. if challenged. |
| Does Circular 905 repeal the Usury Law? | No, it merely suspended ceilings. The Usury Law principles still underpin the “conscience of the court” test. |
| Must interest be in a separate promissory note? | Not necessarily separate, but it must be explicit, written, and signed by the borrower. |
| What if no rate is written but lender collects interest anyway? | Borrower may recover the payments as solutio indebiti; only 6 % legal interest can be adjudged. |
9. Outlook for 2025–2026
- Pending bills in the 19th Congress seek to revive fixed interest ceilings (e.g., 3 % p.m. for salary loans, 5 % p.m. for others), but none have passed committee as of June 2025.
- The BSP and SEC continue to expand fintech oversight; expect broader coverage of interest caps once digital-lending penetration data matures.
- Judicial trend remains borrower-protective: the Supreme Court’s 2024 decisions (e.g., Tamayo v. LVSRC and Magtolis v. Cuevas) reaffirm that even 36 % p.a. can be pared to 6 % p.a. if the loan served a “necessitous personal purpose.”
10. Key Take-Aways
- No universal ceiling – freedom to contract still reigns, but courts are quick to strike down anything above prevailing market rates.
- 6 % p.a. is the modern benchmark – both as legal interest and as a fallback when a stipulated rate is voided.
- Small-loan caps now codified – lending/financing companies must observe SEC MC 3-2022; private casual lenders would do well to mirror these parameters.
- Form over substance matters – lack of a written stipulation zeros out interest altogether.
- Due diligence pays – transparent disclosure and moderate rates protect lenders from litigation and safeguard borrowers’ rights.
Prepared as of 27 June 2025. This article is for informational purposes only and does not constitute legal advice. For specific cases, consult a Philippine‐licensed lawyer familiar with banking and finance law.