(A practitioner-style legal article in Philippine context)

1) The big picture: “Usury” is effectively deregulated, but not a free-for-all

For most private loans in the Philippines, there is no single, across-the-board statutory interest ceiling today. Historically, the Usury Law (Act No. 2655, as amended) set maximum rates, but the Monetary Board/central bank later suspended the ceilings (commonly associated with CB Circular No. 905, 1982). In practice, that means parties generally may agree on interest rates by contract.

However, Philippine law and jurisprudence impose real constraints:

Interest must be expressly agreed upon in writing to be collectible as interest.
Unconscionable or iniquitous interest can be reduced by courts (and in some cases treated as void as to the excess).
Certain loan products/industries may be subject to regulator-imposed caps or specific rules (especially BSP-regulated consumer credit products, and SEC-regulated lending/financing entities’ disclosure and fair dealing requirements).

So: freedom to stipulate is the baseline, judicial and regulatory controls are the backstop.

2) Core Civil Code rules you cannot ignore

A. Interest is not presumed; it must be in writing

Civil Code, Article 1956: No interest shall be due unless it has been expressly stipulated in writing. Practical effect:

If a lender claims “we verbally agreed on 5% monthly,” that is not enforceable as interest unless there is a written stipulation.
The borrower still owes the principal, and may owe damages for delay (see legal interest below), but “interest as interest” needs a written agreement.

B. Stipulated interest vs. penalty charges vs. damages for delay

In Philippine practice, loan documents often include:

Regular/compensatory interest: price for use of money during the term.
Default or moratory interest: higher rate once borrower is in delay/default.
Penalty charge / liquidated damages: fixed charge upon breach (e.g., 5% of unpaid amount).
Attorney’s fees / collection costs clauses.

Courts look at the combined economic burden, not just labels. A “service fee” or “processing fee” that is really compensation for use of money can be treated as part of the effective interest.

C. Courts can reduce excessive charges

Even without a numeric usury ceiling, courts may reduce:

Unconscionable interest (as a matter of equity, public policy, and jurisprudence), and/or
Penalties/liquidated damages (Civil Code Article 1229 expressly allows reduction of iniquitous or unconscionable penalties).

This is why lenders often lose in litigation when they impose extreme monthly rates plus layered penalties.

3) The “legal interest” rate (default interest imposed by law/courts)

A. Current legal interest benchmark: 6% per annum

The Philippines uses a “legal interest” rate for certain situations (e.g., damages for delay; judgments), and the benchmark has been 6% per annum since BSP Circular No. 799 (2013), which adjusted the prior 12% framework.

B. When does 6% apply? (Common scenarios)

Philippine jurisprudence (notably Eastern Shipping Lines and later Nacar v. Gallery Frames) developed rules that, simplified, are commonly applied as follows:

Loans / forbearance of money (contractual debt)

If there is a valid stipulated interest rate, that rate generally applies until fully paid, subject to possible reduction if unconscionable.
If no interest is validly stipulated, interest as such is not collectible; but once the borrower is in delay (after demand, depending on the obligation), the creditor may recover legal interest (6% p.a.) as damages.

Judgments

Once a judgment awarding a sum of money becomes final and executory, the amount adjudged typically earns 6% p.a. until full satisfaction (post-judgment interest), because at that stage the obligation is treated like a forbearance.

C. Demand and delay matter

For many obligations, interest as damages for delay typically runs from:

Judicial demand (filing of the complaint), or
Extrajudicial demand (written demand), depending on the nature of the obligation and the evidence of demand.

Loan documents often specify that the loan becomes due upon maturity and that default occurs automatically after a grace period—those clauses affect when “delay” starts.

4) Usury Law status: “suspended,” not “repealed” (and why that matters)

Even if ceilings are lifted, the historical Usury Law framework is still frequently discussed because:

The central bank/Monetary Board’s action is understood as suspending the ceilings, not deleting the statute from the books.
In theory, ceilings could be reimposed by regulation for classes of credit, and regulators do sometimes impose caps for consumer protection in specific products.

In litigation, borrowers still invoke “usurious” rates colloquially, but courts usually decide cases using unconscionability, public policy, and equity, rather than applying an old numeric ceiling.

5) Interest caps and special regulatory regimes (where ceilings may exist)

Even with general deregulation, some areas have product-specific or industry-specific controls:

A. BSP-regulated financial institutions and consumer credit products

Banks, quasi-banks, and other BSP-supervised institutions are subject to BSP rules on:

Disclosure (effective interest rate, fees, finance charges)
Fair treatment and consumer protection standards
Specific product ceilings, if and when imposed by BSP for consumer protection

A key modern example is credit card finance charges, where BSP has implemented a maximum monthly rate for interest/finance charges (commonly cited in practice as 3% per month) for credit card transactions of BSP-supervised entities. (If you are applying this in a live matter, verify the current circular and effective date as amendments are possible.)

B. Pawnshops

Pawn transactions are governed by pawnshop laws and BSP regulations for pawnshops. Historically, regulators have set or guided allowable charges (interest/service charges) and disclosure practices. If your “loan” is a pawn, treat it as a distinct regulated product, not a simple Civil Code loan.

C. SEC-regulated lending and financing companies

Lending Company Regulation Act of 2007 (RA 9474) and Financing Company Act (RA 8556) (and related SEC circulars) emphasize:

Registration and supervision
Truthful disclosure of rates/fees
Prohibitions on unfair collection practices and misleading terms While these statutes are not always framed as “caps,” SEC rules can effectively constrain pricing through compliance, disclosure, and enforcement actions—especially for abusive “hidden charges.”

D. Truth in Lending (RA 3765) and related rules

RA 3765 requires lenders in covered credit transactions to disclose clearly:

Finance charges
Effective interest rate or its equivalent disclosures under implementing rules
Other material terms Failure can lead to administrative and civil consequences, and it strengthens borrower defenses when charges were not properly disclosed.

6) How courts decide if an interest rate is “unconscionable”

There is no single statutory percentage test. Courts typically consider:

Stark disproportionality (e.g., extremely high monthly rates)
Layering: regular interest plus default interest plus penalties plus fees
Borrower’s circumstances and bargaining power (consumer vs. commercial)
Good faith, transparency, and disclosure
Whether the terms effectively become confiscatory or a penalty disguised as interest

Common judicial outcomes include:

Reducing the rate to a more reasonable level
Striking default interest while retaining regular interest
Reducing penalties under Art. 1229
Applying legal interest (6% p.a.) in place of invalid/excessive charges

7) Compounding, “interest on interest,” and capitalization

A. Compounding must be clearly agreed

If the lender wants compounding (e.g., unpaid interest becomes part of principal), this must be clearly authorized in the contract and must still pass fairness scrutiny.

B. “Interest on interest” is generally restricted

Civil Code concepts and jurisprudence typically allow interest on unpaid interest only in limited circumstances (commonly after judicial demand or when interest has become due and demandable and the parties validly agree), and courts are wary of arrangements that balloon debt unfairly.

8) Practical drafting and compliance notes (what lawyers actually check)

For lenders (to keep clauses enforceable)

Put the interest rate in writing (Art. 1956 compliance).
Specify:
- Principal, term, payment schedule
- Regular interest (annualized and monthly, if used)
- Default interest trigger and rate
- Penalties (if any) and basis
- Fees (processing, late fees) and what they cover
Avoid “stacking” charges that create a punitive effective rate.
Provide clear disclosures (RA 3765; BSP/SEC rules as applicable).
Make demand and default mechanics clear (notice, cure period, maturity).

For borrowers (to assess exposure and defenses)

Compute the effective annual cost (monthly rates and add-on interest can be misleading).
Look for:
- Vague “interest at lender’s option” language
- Unclear fees that function as extra interest
- Default clauses that double or triple charges
Preserve evidence of:
- Payments
- Demands/notices
- Disclosures provided (or not provided)

9) Enforcement and litigation: what usually happens

In collection cases, issues commonly litigated are:

Whether interest was validly stipulated in writing
Whether default interest/penalties are unconscionable
When delay started (affects when interest runs)
Whether disclosure laws were followed
Application of 6% legal interest on adjudged sums, especially post-judgment

Courts often award:

Principal
Reasonable interest (stipulated if fair; otherwise reduced or replaced)
Legal interest (commonly 6% p.a.) where appropriate
Reduced penalties/fees if excessive

10) A quick working guide (rules of thumb)

No written interest clause = no collectible contractual interest (but legal interest may apply upon delay).
No general usury ceiling for ordinary loans, but courts will cut down abusive rates.
6% per annum is the prevailing legal interest benchmark used widely for damages and judgments.
Some products (notably credit cards and certain regulated sectors) may have specific caps or stricter rules.
Always evaluate the total finance burden, not just the headline rate.

11) If you want this as a publishable article packet

I can also format the above into:

a law review-style article (with footnote placeholders to the Civil Code, key cases, BSP/SEC issuances), or
a client-facing explainer (FAQs + sample computations + clause checklist).