Legal Interest Rate on Individual Loans in the Philippines – A Comprehensive Guide (as of June 2024) For academic discussion only; always consult a qualified Philippine lawyer for concrete advice.
1. Governing Legal Framework
| Source | Key Provisions Relevant to Interest |
|---|---|
| Civil Code of the Philippines (Republic Act No. 386, 1949) | • Art. 1956 – Monetary interest must be expressly stipulated in writing. • Art. 1959 – Capitalization/compounding of interest likewise requires an express written agreement. • Arts. 2209‑2213 – Judicial or extrajudicial interest as damages. |
| Usury Law (Act No. 2655, 1916, as amended) | Sets ceilings but these ceilings have been “suspended” since Central Bank (CB) Circular 905 (22 Dec 1982). The statute is not repealed; only its rate‑setting power lies dormant. |
| Bangko Sentral ng Pilipinas (BSP) issuances | • Monetary Board (MB) Circular 799 (effective 1 July 2013) reset the legal interest rate at 6 % per annum for “loans or forbearance of money, goods or credit” and for money judgments, superseding 12 %. • Circular 830, 2014, clarified the 6 % benchmark. • Circular 1133 (2022) requires Truth‑in‑Lending style disclosure for all lending‑ and financing‑company loans. |
| Nacar v. Gallery Frames (G.R. No. 189871, 13 Aug 2013) | Landmark Supreme Court decision adopting MB Circular 799: 6 % p.a. is now the “legal interest” under Arts. 2209 & 2212. |
| Lending Company Regulation Act (RA 9474, 2007) | Requires SEC‑licensed lending companies to fix interest “reasonable and not unconscionable” and to make full disclosures. |
| FinTech regulations (BSP Circular 1210, 2024) | Imposes consumer‑protection and disclosure rules on digital‑lending platforms; no quantitative cap, but enables BSP to sanction “excessive” rates. |
| Truth in Lending Act (RA 3765, 1963) & BSP Circular 730, 2011 | Mandate disclosure of effective interest rate (EIR), other charges, and amortization schedule. |
2. The Current “Legal Interest Rate”: 6 % p.a.
- Default rule when the contract is silent – Courts automatically apply 6 % per annum simple interest from (a) date of demand or (b) date of filing of the complaint until full payment (Arts. 2209‑2212; Nacar).
- Also used for judgments – Money judgments unconnected with a loan likewise earn 6 % from finality of decision until satisfaction.
- Distinction from BSP policy rates – The Monetary Board’s overnight reverse‑repurchase (RRP) rate influences market pricing, but does not alter the statutory 6 % legal rate unless the BSP issues a specific circular.
3. Contractual Interest: Freedom to Stipulate vs. Judicial Moderation
| Scenario | Rule | Illustrative Jurisprudence |
|---|---|---|
| Written stipulation present | Parties may agree on any rate. The Usury Law ceiling is suspended. | Security Bank v. Spouses Banawan (G.R. 193137, 11 June 2014). |
| Unconscionable/inaffordable rate | Courts may reduce or void the rate under Art. 1229 (equitable reduction) or Art. 1409 (void stipulation). | Medel v. CA (G.R. 131622, 27 Nov 1998) – 5.5 % per month reduced to 12 % p.a.; Spouses Castro v. Tan (G.R. 168940, 19 Jan 2021) – 6 % per month reduced to 12 % p.a. |
| Compounded or penalty interest | Requires clear, separate, written consent. Penalty clauses may likewise be reduced if unconscionable. | Phil. National Bank v. CA (G.R. 121612, 10 Aug 1998). |
Practical tip: Even where parties are free to set high rates (e.g., 3–5 % per month typical in informal lending), courts are alert to indicators of adhesion or unfair bargaining power.
4. Interaction with Specialized Sectors
- Microfinance & salary‑deduction loans – BSP recognizes that “flat‑rate” quotes can mask EIRs exceeding 60 % p.a.; Circular 1133 requires EIR disclosure and caps certain fees.
- Pawnshops – Governed by PD 114 (Pawnshop Regulation Act) & BSP Manual of Regulations for Non‑Bank Financial Institutions. Interest and service charge combined must not exceed 4 % per month on any portion of the principal.
- Credit‑card interest – No statutory ceiling. BSP capped finance charges at 2 % per month (24 % p.a.) from Nov 2020 to Oct 2022 because of pandemic concerns, then raised to 3 % per month (Circular 1165, 2023).
- Securities‑backed margin loans – Subject to Securities Regulation Code (RA 8799) and PSE rules; pricing is contractual but monitored by SEC for abusive lending.
5. Default, Damages, and Litigation Interest
- Extrajudicial demand triggers 6 % interest as damages even if no rate was fixed (Art. 1169, NCC).
- Judicial demand – When plaintiff prays for a specific sum that is “liquidated” (determinable), 6 % runs from date of complaint.
- Unliquidated claims – Courts may award 6 % from date of decision if the amount needed court determination (Eastern Shipping Lines v. CA, 234 SCRA 78 [1994], as updated by Nacar).
- Post‑judgment – Regardless of original rate, 6 % again applies from finality until satisfaction.
6. Statutory and Regulatory Reporting Duties
| Requirement | Who Must Comply | Main Content |
|---|---|---|
| Truth‑in‑Lending Statement | Banks, lending & financing companies | Finance charge (pesos), EIR, total cash price, amount financed, schedule of payments. |
| SEC Form LC (for Lending Companies) | SEC‑licensed lenders | Quarterly report of weighted‑average nominal rates. |
| BSP Consumer Protection Framework (Circular 1167, 2023) | BSP‑supervised Financial Institutions (BSFIs) | Must adopt board‑approved policies for equitable pricing; disclosure in plain‑language loan contracts. |
Non‑compliance may lead to administrative fines, suspension of license, and criminal liability under RA 9474 (for lending companies) or RA 7653 (New Central Bank Act) for BSFIs.
7. Criminal Exposure: When Interest Becomes Usury‑Like Behavior
- Syndicated Estafa (PD 1689) – Extremely high rates coupled with a scheme to defraud may be prosecuted.
- Anti‑Violence and Harassment laws – Collectors using threats can face criminal cases regardless of rate.
- Unregistered “five‑six” lenders – Lending without an SEC license is per se a criminal offense; unconscionable rates aggravate penalties.
8. Key Take‑Aways for Individual Borrowers & Lenders
- Write it down – Interest or compounding not in writing is void.
- 6 % default rule – When in doubt, courts fall back on 6 % simple interest.
- No absolute ceiling – But courts strike down rates that “shock the conscience.”
- Disclosure cures many ills – Transparent EIR and fee breakdown minimize later litigation.
- Regulators watch consumer loans – Digital‑lending apps and credit‑card issuers face heightened scrutiny.
9. Checklist Before Entering a Personal Loan Contract
| ✅ Item | Why it Matters |
|---|---|
| Written loan agreement & promissory note | Art. 1956 compliance |
| Stated nominal rate and EIR | Secures informed consent, passes BSP/SEC review |
| Clear due dates, grace periods, penalty rate | Avoids ambiguity in default calculations |
| Clause on remedial interest after maturity | Determines whether original or legal rate applies |
| Separate signatures for compounded or penalty interest | Required by Art. 1959 |
| Cooling‑off or pre‑termination terms | Consumer‑friendly, may be required by BSP Circular 1167 |
10. Looking Ahead
As of June 2024, no pending Philippine bill proposes to restore statutory usury ceilings. Instead, regulators rely on “reasonableness” tests, information disclosure, and threat of judicial reduction to protect borrowers. Nevertheless, observers expect the BSP to reassess the 6 % legal rate if inflation or policy rates move sharply.
Prepared by: [Your Name], Philippine commercial‑law practitioner / researcher (All statutes and case citations are in the public domain. This article is current as of June 2024 and does not cover developments thereafter.)