Online lending applications, commonly known as fintech lending platforms or digital lending apps, have transformed access to credit in the Philippines by offering quick, paperless loans to individuals and small businesses, particularly the unbanked and underbanked. These platforms range from legitimate, BSP-regulated entities to unlicensed operators often associated with predatory practices. A central concern is the imposition and enforcement of legal interest rate caps to protect borrowers from usurious or unconscionable charges while balancing financial inclusion and market competition. This article provides a comprehensive overview of the legal regime governing interest rates on online lending apps in the Philippine jurisdiction.

Historical and Legal Framework

The regulation of interest rates in the Philippines traces back to Act No. 2655, the Usury Law of 1916, which originally fixed maximum rates at 12% per annum for secured loans and 14% for unsecured loans. Presidential Decree No. 1684 (1980) amended this law by delegating to the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) the authority to prescribe or suspend interest rate ceilings.

The Monetary Board exercised this power sparingly and eventually suspended general usury ceilings for most credit transactions to promote economic liberalization and financial inclusion. As a result, interest rates in private lending contracts are now primarily governed by the agreement of the parties, subject to the principle that stipulations must not be contrary to law, morals, good customs, public order, or public policy (Civil Code, Article 1306).

Key statutes and regulations include:

Republic Act No. 9474 (Lending Company Regulation Act of 2007) – Governs non-bank lending companies, including those operating digital platforms.
Republic Act No. 3765 (Truth in Lending Act) – Mandates full, clear, and accurate disclosure of the cost of credit, including the effective interest rate (EIR) or annual percentage rate (APR).
Republic Act No. 7394 (Consumer Act of the Philippines) – Prohibits unconscionable credit practices and deceptive acts in consumer transactions.
BSP Circulars and Regulations – Particularly those under the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) and the FinTech Regulatory Framework. Relevant issuances cover licensing of lending and financing companies, digital financial services, and responsible lending guidelines.
Civil Code provisions (Articles 1956–1961 on interest and usury) and jurisprudence on unconscionable contracts.

Online lending apps fall under BSP supervision when they engage in regular lending activities, whether as standalone lending companies or as extensions of digital banks, e-money issuers, or financing entities.

Current Status of Interest Rate Caps

There is no fixed statutory or BSP-imposed ceiling on interest rates for loans extended by licensed lending companies and digital lending platforms. The deregulation policy remains in effect, allowing contractual freedom in setting rates to reflect credit risk, operational costs, and market conditions.

However, this freedom is not absolute:

Rates must be reasonable and not unconscionable. Philippine courts have consistently ruled that excessively high interest rates may be struck down or equitably reduced. Landmark jurisprudence, such as Medel v. Court of Appeals (G.R. No. 131622, 1998) and subsequent cases, has treated monthly rates of 5% and above (or equivalent annualized rates exceeding 60–100%) as potentially usurious or unconscionable, often reducing them to 1%–2% per month or aligning them with prevailing bank lending rates.
The BSP retains authority under PD 1684 to re-impose ceilings if public interest so requires, though it has not done so generally for consumer or commercial loans.
For specific categories, such as agricultural loans, microfinance loans by accredited institutions, or certain government-supported credit programs, targeted rate caps or subsidized rates may apply through separate regulations (e.g., via the Agricultural Credit Policy Council or Land Bank programs).

In practice, legitimate online lending apps typically charge effective monthly rates ranging from 1% to 4–5%, depending on loan tenure, borrower risk profile, and platform model. Unlicensed or predatory apps have been documented charging daily rates of 1–3% or more, which annualize to several hundred percent.

Licensing and Regulatory Requirements for Online Lending Apps

To operate legally and charge agreed interest rates, an online lending app must:

Register as a lending company or financing company with the BSP and secure the appropriate license or certificate of authority.
Comply with minimum capitalization requirements (generally PHP 1 million for basic lending companies, higher for expanded operations).
Maintain an office or principal place of business in the Philippines.
Adhere to strict Know-Your-Customer (KYC), anti-money laundering (AML), and data privacy (Republic Act No. 10173) standards.
Implement responsible lending practices, including credit scoring, affordability assessments, and limits on debt-to-income ratios to prevent over-indebtedness.
Integrate with the Credit Information Corporation (CIC) for credit reporting.

Unlicensed platforms are considered illegal lending operations and are subject to shutdown by the BSP, Securities and Exchange Commission (SEC), Department of Trade and Industry (DTI), and law enforcement agencies through the Inter-Agency Council on Anti-Illegal Lending and Investment Scams.

Disclosure and Transparency Obligations

Under the Truth in Lending Act and BSP rules, every online lending app must disclose in a clear, conspicuous, and understandable manner before loan consummation:

The principal loan amount.
The nominal interest rate and the effective interest rate (EIR), computed to reflect all charges.
All fees, service charges, penalties, and other costs.
The total amount repayable and the repayment schedule.
The annualized percentage rate (APR) where applicable.
Consequences of default, including collection practices.

Failure to disclose renders the lender unable to collect charges beyond the principal and subjects it to penalties. Many apps now present this information through standardized digital loan agreements and calculators within the application interface.

Prohibited Practices and Penalties

The following are prohibited or heavily restricted:

Charging hidden fees or undisclosed charges.
Automatic roll-over or renewal of loans without explicit borrower consent.
Harassing or coercive collection methods (prohibited under the Collection of Checks and Loans Act and BSP rules).
Imposition of interest on interest (compound interest) unless expressly agreed and not unconscionable.
Targeting vulnerable borrowers without proper affordability checks.
Operating without BSP license while representing legitimacy.

Penalties for violations include:

Fines and imprisonment under RA 9474 and the Truth in Lending Act.
Revocation of license by the BSP.
Administrative sanctions, cease-and-desist orders, and inclusion in watchlists.
Civil liability for damages and refund of excess interest collected.
Criminal prosecution for syndicated estafa or illegal recruitment in severe cases involving multiple victims.

Judicial and Administrative Remedies for Borrowers

Borrowers facing excessive rates may:

Seek judicial declaration that the interest is unconscionable and request reduction to a reasonable level (typically benchmarked against Treasury bill rates plus a reasonable spread or prevailing bank rates).
File complaints with the BSP Consumer Assistance Mechanism, DTI Consumer Protection Division, or the National Privacy Commission for data-related issues.
Report illegal lending to the Philippine National Police Anti-Cybercrime Group or the Inter-Agency Task Force.
Avail of debt relief or restructuring programs during economic crises, as seen in past BSP and government initiatives.

Courts apply the test of unconscionability by examining the circumstances at the time of contracting, the borrower’s bargaining power, and the disparity between the rate and market norms.

Special Considerations

Digital Banks and E-Money Issuers: Platforms operated by BSP-licensed digital banks (e.g., those offering credit lines) are subject to stricter prudential regulations, including limits on lending rates indirectly influenced by risk-based capital requirements and consumer protection rules.
Peer-to-Peer (P2P) Lending Platforms: These are regulated under specific BSP circulars on innovative financial technologies and must ensure that underlying loan rates comply with fair lending standards.
Microfinance and Small Loans: Accredited microfinance institutions may operate under lighter but still transparent rate regimes to support financial inclusion.
Cross-Border and Foreign Platforms: Foreign-operated apps targeting Philippine residents must comply with local licensing or face blocking and enforcement actions.
Impact of Economic Conditions: During crises (e.g., pandemics or inflation spikes), the BSP has issued temporary relief measures, such as loan moratoriums or interest capping on restructurings for affected borrowers.

Challenges and Enforcement Landscape

Despite the regulatory framework, challenges persist. Many borrowers do not read disclosure statements, and unlicensed apps proliferate through social media and app stores. The BSP, in coordination with the SEC, Google Play, and Apple App Store, regularly issues advisories and requests takedowns of illegal platforms. Public education campaigns emphasize verifying BSP registration before borrowing.

The absence of a bright-line statutory cap continues to spark legislative proposals in Congress to impose explicit monthly or annualized ceilings on digital consumer loans. As of the prevailing legal regime, however, protection relies on contractual freedom tempered by judicial oversight, mandatory disclosure, and administrative supervision.

This framework seeks to foster a competitive yet responsible digital lending ecosystem that expands credit access while safeguarding borrowers from exploitative practices. All parties—lenders, borrowers, and regulators—must remain vigilant in upholding the principles of transparency, fairness, and the best interest of consumers in the evolving fintech landscape.