Legal Interest Rate Limits and Usury Law in the Philippines
(A comprehensive doctrinal and jurisprudential survey as of April 2025)
1. Historical Roots
| Milestone | Key Features |
|---|---|
| 1907 Code of Commerce (Art. 314) | First general limit: 12% p.a. on commercial loans without written stipulation. |
| Act No. 2655 – The Usury Law (enacted 1916, repeatedly amended) | • Fixed ceilings for various classes of loans (ranging from 6% p.a. on secured obligations to 12% p.a. on pawns). • Criminal penalties for usurious exactions. |
| Republic Acts 1384 & 3765 (Truth-in-Lending Act, 1963) | Required full disclosure of the effective cost of borrowing. |
| Central Bank Circular 905 (Dec 22 1982) | Suspended all interest-rate ceilings under Act 2655 and delegated future rate-setting to the Monetary Board “as market conditions warrant.” The Usury Law was not repealed; only its ceilings were lifted. |
Since Circular 905, the Philippines has operated under a market-oriented regime: parties may stipulate any rate, but courts may still strike down rates that are “unconscionable.”
2. Governing Statutes & Regulations (2025 snapshot)
| Source | Core Rule on Interest |
|---|---|
| Civil Code (1950) | • Art. 1956: No interest may be charged unless expressly agreed in writing. • Art. 2209: In the absence of stipulation, “legal interest” of 6% p.a. applies. |
| General Banking Law 2000 (RA 8791) | Empowers the Bangko Sentral ng Pilipinas (BSP) to fix ceiling rates for credit cards, micro-finance, pawnshops, and similar retail creditors “when warranted by economic conditions.” |
| Micro-Finance Circular 272 (2001) | Caps service charge for micro-finance at 2.5% per month on the declining balance; effective rate usually around 30–36% p.a. |
| Credit Card Rate Cap (BSP Memorandum M-2020-072, Oct 2020; reiterated & adjusted 2022 & 2024) | • Finance charge: 2.0 % p.m. (24 % p.a.) on unpaid balance; raised to 3.0 % p.m. (36 % p.a.) in 2024 to reflect policy-rate hikes. • Processing fees on cash advances limited to ₱200 per transaction. |
| Pawnshop Regulations (Manual of Regulations for Non-Bank Financial Institutions, “MORNBFI”) | No fixed ceiling, but pawnshops must disclose the percentage to maturity and effective interest rate (EIR) in the pawn ticket. Borrower may redeem within 90 days after maturity for principal + accrued interest. |
| Cooperative Code (RA 9520) | Credit cooperatives may lend only to members; rates set by the board but must comply with BSP disclosure rules. |
| Anti-Predatory Lending Bill (still pending 19th Congress) | Proposes to reinstate hard caps at roughly 48 % p.a. for consumer loans under ₱500 k; not yet law as of April 2025. |
3. Judicial Doctrine: Unconscionability Control
Because Circular 905 left the Usury Law alive but ceiling-less, the Supreme Court became the ultimate “rate regulator” through equity:
| Case | Ratio / Guideline |
|---|---|
| Medel v. CA, G.R. 131622 (27 Nov 1998) | 66% p.a. on a P500 k loan reduced to 12% p.a. Court stressed the need to strike down “sky-high” rates despite Usury Law suspension. |
| Spouses Abella v. CA, G.R. 100633 (16 Jul 2001) | 48% p.a. declared unconscionable; reset to 12% p.a. |
| Castro v. Tan, G.R. 168940 (15 Feb 2007) | 7% per month ≈ 84% p.a. ruled void; reduced to 12% p.a. |
| Nacar v. Gallery Frames, G.R. 189871 (13 Aug 2013) | Reset the legal or judicial interest to 6% p.a. (from 12%) for monetary judgments & forbearance of money following Monetary Board Res. 796-2013. |
| Heirs of Malate v. Gamboa, G.R. 195253 (25 Jan 2016) | Clarified that the 6% p.a. applies from extrajudicial demand if principal already due; from finality of judgment if claim was unliquidated. |
| Home Credit v. Spouses Alapan, G.R. 254255 (20 Mar 2024)** | Latest reiteration: contractual interest above 60 % p.a. on consumer installment loan struck down as “patently excessive”; substituted with 12 % p.a. until June 30 2013, then 6 % p.a. thereafter to align with Nacar. |
Rule of thumb: When a stipulated rate > 48 % p.a. without commercial justification, expect judicial reduction. Even rates between 24 %–48 % p.a. can still be trimmed if (i) the borrower is a consumer, (ii) the loan is small/short-term, and (iii) lender’s risk is minimal.
4. “Legal” vs. “Contractual” vs. “Judicial” Interest
| Scenario | Rate | Computation Base |
|---|---|---|
| No written stipulation (Art. 1956) | 6 % p.a. legal interest (Art. 2209) | From date of demand or filing of complaint until full payment. |
| Written stipulation (valid rate) | Agreed rate | • Until maturity or until court deems rate unconscionable. • If loan becomes due and unpaid, agreed rate applies as penalty unless court reduces. |
| Court-awarded damages (unliquidated claims, tort, labor) | 6 % p.a. | • No interest before judgment. • 6 % p.a. from judgment date until finality; 6 % on the final amount thereafter until satisfied. |
| Judicially-reduced loan | Often reset to 12 % p.a. for periods before July 1 2013, then 6 % p.a. afterwards (per Nacar). |
5. Special-Sector Caps and Soft Controls
- Credit Cards – BSP periodically reviews the cap (currently 3 % p.m.) in light of policy-rate changes. Issuers may impose lower promotional rates but must disclose Annual Percentage Rate (APR).
- Salary-Deduction Lenders / Financing Companies – Governed by SEC Memorandum Circular 19-19; must show Total Cost of Credit (TCC). No ceiling, but SEC can sanction “abusive collection practices.”
- Online Lending Apps – Under BSP-SEC-NTC Joint Memorandum 21-01, apps must register and show EIR; hidden “service fees” counted towards interest for cap-compliance.
- Pawnshops – Instead of ceilings, the BSP uses competition & disclosure: shops must post the percentage to maturity on posters at the counter and on pawn tickets in bold 12-point type.
- Cooperatives & Micro-Finance NGOs – Enjoy tax and supervisory privileges but must follow 2.5 % per-month cap on service charges and provide financial education to borrowers.
6. Criminal Liability After Circular 905?
- Charging a high rate no longer, by itself, triggers criminal usury.
- BUT Penal liability may still arise from:
- Estafa (Art. 315 RPC) if lender conceals charges or forges documents.
- Violations of the Truth-in-Lending Act (fines up to ₱50 k per count, plus SEC/BSP closure of business).
- Lending Investor’s Act (RA 9474) offenses – operating without SEC license carries ₱100 k–₱1 M fine and/or 6-10 years imprisonment.
7. Key Compliance Checklist for Lenders (April 2025)
- Written contract expressly stating nominal rate and effective rate (EIR/APR).
- Itemized schedule of all fees, penalties, documentary stamps.
- For rate-capped products (credit cards, micro-finance), certify quarterly that portfolio EIR ≤ cap.
- Pre-payment: allow borrower to pre-terminate any time; compute interest only up to date of payment; no pre-payment penalty for housing loans under ₱2 M (RA 11211).
- Collection: comply with BSP-SEC Fair Debt Collection Rules (no calls after 8 p.m.; no social-media shaming).
- Data-privacy: explicit borrower consent before accessing contact list (NPC Circular 20-01).
8. Reform Proposals on the Horizon
| Proposal | Status (as of 30 Apr 2025) | Main Points |
|---|---|---|
| Usury Law Restoration Bill (H.B. 8990 / S.B. 2485) | Pending committee report, 19th Congress | Hard cap: 3 % monthly on unsecured consumer loans ≤ ₱500 k; 2 % monthly on secured loans; automatic indexation every 3 years. |
| National Financial Literacy Program Act | Bicameral conference approved Apr 2025 | Makes borrower education mandatory for all consumer-credit providers; violations subject to ₱100 k per count. |
| Anti-Predatory Lending Act | On second reading, House | Bars compounding more often than monthly; caps loan-related fees at 5 % of principal. |
9. Practical Take-Aways
- There is no statutory maximum interest rate today, except in narrowly defined sectors (credit cards, micro-finance).
- Courts routinely police “unconscionable” rates – anything over 48 % p.a. is on shaky ground; the higher above 24 % p.a., the more a lender should be prepared to prove economic necessity.
- Legal Interest = 6 % p.a. since 01 July 2013 (per Nacar and MB Res. 796-2013).
- For historical periods before 01 July 2013, 12 % p.a. remains the benchmark for re-computations.
- Full-cost disclosure is not optional. Hidden “service fees” constitute interest for cap and unconscionability analysis.
- Legislative winds are shifting toward re-imposing hard caps; lenders should build scenarios for a 36 % or even 24 % p.a. ceiling within the decade.
- Borrowers who agreed to exorbitant rates are not defenseless: the remedy is a civil action to re-compute the obligation and for refund of excess interest—not a refund of the principal.
10. Checklist for Borrowers Contesting Exorbitant Interest
- Gather all documents: promissory notes, receipts, statements, text/email notices.
- Compute EIR/APR (use BSP formula) – courts focus on effective cost, not the nominal “2% per month” tag.
- File demand letter invoking Art. 1956 & 2212 Civil Code; offer tender of principal + 6 % p.a.
- If suit is inevitable: plead for judicial reduction, citing Medel, Castro, Nacar, plus any changed economic circumstances (e.g., policy-rate cuts).
- Ask for damages & attorney’s fees if lender used harassment or publicly shamed borrower (Data Privacy & Fair Debt infractions).
11. Conclusion
While the Philippines technically suspended usury ceilings over forty years ago, interest-rate freedom is not absolute. The Bangko Sentral imposes sector-specific caps when macro-stability or consumer protection demands, and the Supreme Court stands ready to void “shock-the-conscience” rates. Both lenders and borrowers must therefore navigate a hybrid regime of contractual autonomy, regulatory soft caps, and equitable judicial oversight—one likely to tighten further if pending legislation crystallizes.
Prepared by: [Your Name], J.D., LL.M. | 30 April 2025