Legal Interest Rates and Penalties on Online Loans in the Philippines

Updated to the Philippine legal framework as commonly applied today. This is general information, not legal advice.

1) Big picture

There is no fixed “usury ceiling.” The statutory interest cap under the old Usury Law has long been lifted, so parties may generally agree on the rate.
But courts will strike down or reduce rates and penalties that are “unconscionable.” Even if the borrower signed, Philippine courts routinely pare back excessive interest and default charges.
If no rate is validly agreed in writing, legal interest applies at 6% per annum.
Online lenders face special conduct rules and caps for small, short-term loans. Lending/financing companies and their online lending platforms (OLPs) must follow SEC rules on pricing, disclosures, and collections, plus data-privacy and anti-harassment rules.

2) Primary legal sources (what actually governs)

Civil Code
- Interest must be in writing to be enforceable (Art. 1956).
- Penalty clauses (e.g., late charges, liquidated damages) are allowed, but courts may reduce them if they are iniquitous or unconscionable (Arts. 1226–1230).
- Compounding (interest on interest) requires express stipulation; otherwise it is disallowed. Even when stipulated, courts may still reduce if excessive.
Usury Law & Monetary Board circulars
- While the usury ceilings are no longer in force, this did not legalize predatory pricing. Courts apply the Civil Code to curb oppressive terms.
Legal interest rate (when no valid stipulation applies; also for damages/forbearance)
- 6% per annum is the prevailing legal rate on loans/forbearance and on monetary judgments, applied by courts when:
  - the contract lacks a written rate;
  - the stipulated rate is void (e.g., unconscionable); or
  - the case has moved to the judgment phase (post-judgment interest).
Truth in Lending Act (RA 3765) and implementing rules
- Requires clear disclosure of the finance charge and the effective cost of credit (APR-type disclosure), presented before the borrower is bound.
Lending/Financing Company Regulation Act (RA 9474) & SEC rules
- Lending companies (LCs), financing companies (FCs), and OLPs must be SEC-registered and comply with pricing caps (for small, short-term loans), standardized disclosures, advertising rules, and fair debt collection standards.
- Small, short-term loan cap (common online “cash” loans): For loans up to ₱10,000 with terms up to 4 months, regulators have imposed:
  - a monthly nominal interest cap (commonly up to 6%/month);
  - an all-in cost cap (commonly up to 15%/month, inclusive of interest and all other fees/charges, except late penalties); and
  - late payment penalties capped (commonly up to 5%/month of the unpaid amount). Notes: (a) These caps are specifically targeted to small-ticket, short-tenor loans typically offered online; (b) caps operate in addition to general unconscionability control; and (c) lenders remain responsible for clear, prior disclosure and no junk fees.
Fair debt collection & data privacy
- Abusive collection tactics are prohibited (harassment, threats, public shaming, contacting the borrower’s phone contacts, etc.).
- The Data Privacy Act requires lawful basis, proportional data collection, minimal access, and secure processing; misuse of contact lists or excessive permissions from mobile apps can trigger liability.

3) What counts as “interest,” “fees,” “penalties,” and how they’re policed

Stipulated interest — the periodic price of credit (e.g., “3% per month”). Must be in writing.
Default or “penalty” interest — a higher rate triggered by delay. Courts closely scrutinize this and often reduce it when stacked with other charges.
Non-interest fees — processing fees, service fees, disbursement fees, verification fees, convenience fees, etc. For small online loans, these are typically counted inside the all-in monthly cap; labeling them differently doesn’t remove them from the cap.
Late payment penalties — fixed amounts or percentages applied after due date; subject to the late-penalty cap (for small loans) and to judicial reduction if oppressive.
Compounding — charging interest on unpaid interest. Valid only if expressly agreed and still reviewable for unconscionability.

Key guardrails that repeatedly show up in cases and rules:

Courts invalidate or cut down stacked charges (e.g., high base interest + high default interest + high penalty + high service fees + compounding).
If the stipulated rate/penalties are void or pared down, courts typically default to 6% p.a. for the compensatory component.
Acceleration clauses (making the whole balance immediately due upon default) are valid if reasonable and clearly written; still subject to equity and good faith.

4) How courts treat “unconscionable” rates and penalties

Courts look at totality: the nominal rate, effective burden (including fees), whether the borrower is vulnerable (e.g., emergency cash, app-based microlending), market practice, disclosure quality, and negotiation power.
Rates like 3%–5% per month (36%–60% p.a.) have frequently been reduced, especially when paired with hefty fees, step-up default interest, or compounding.
Penalty interest that simply doubles or triples the running rate is routinely trimmed.
Where charges are egregious, courts sometimes:
- delete default interest and penalties entirely;
- keep only 6% p.a. from default or filing of suit; and
- disallow compounding.

5) Online-specific compliance (what an OLP must do)

License & corporate disclosures
- Operate only through an SEC-registered LC/FC. Display the registered name, certificate numbers, and contact details in the app/storefront and loan documents.
Up-front, plain-language cost disclosure
- Show the monthly rate and the effective monthly all-in charge for small loans, itemizing all fees.
- Provide a peso-denominated amortization schedule before acceptance.
Fair debt collection
- No threats, false representations, public shaming, or contacting the borrower’s employer/relatives/phone contacts (unless legally justified and proportionate).
- Use traceable, respectful channels. Keep call frequency reasonable. Maintain call logs.
Data privacy hygiene
- Request only necessary device permissions; avoid blanket access to contacts/photos/files.
- Have a privacy notice, retention limits, and vendor DPAs. Secure data at rest and in transit.
- Honor data subject rights (access, correction, deletion, complaint mechanisms).
Advertising
- Avoid misleading “0% interest” claims when fees exist. The effective charge must remain within caps and be clearly disclosed.

6) Practical computations (to get the math right)

From “per month” to “per annum.” A monthly nominal rate of 3% ≈ 36% p.a. (simple). If compounded monthly, (1.03¹² − 1) ≈ 42.6% p.a.
All-in cap check for a small online loan. Suppose ₱5,000 for 30 days:
- Interest at 4% = ₱200
- Processing/other fees must be set so that interest + all fees ≤ 15% of ₱5,000 = ₱750
- If the borrower pays late, late penalty ≤ 5% of the unpaid amount per month (separate from the 15% all-in cap).
Default interest stacking. If contract sets 3%/mo regular + additional 3%/mo upon default + 5%/mo penalty and compounds monthly, this will almost certainly be cut down by a court.

7) What borrowers should check (and what to do if things go wrong)

Is the lender/OLP licensed? Confirm it is an SEC-registered lending or financing company.
Exact written rate and fees. If the rate isn’t in writing, lender can’t charge it; 6% p.a. legal interest typically applies instead.
Are charges within the small-loan caps? For ≤₱10,000 and ≤4 months, verify the monthly rate, the all-in monthly cost (≤15%), and late penalty (≤5%/mo).
Any compounding? If yes, was it explicitly agreed?
Collection behavior. Keep screenshots/recordings of harassment or contact scraping; these support complaints.
Remedies:
- Write to the lender invoking caps/unconscionability and request a recomputation;
- File complaints with the SEC (lending/collections), NPC (privacy abuses), or DTI (consumer protections for advertising);
- If sued, raise defenses: lack of written rate, unconscionability, invalid compounding, or cap violations; ask for 6% p.a. and judicial reduction of penalties.

8) What compliant lenders do (a quick checklist)

Use clear, bilingual (EN/Filipino) loan summaries with: amount financed, term, due date, monthly nominal rate, effective all-in monthly cost, itemized fees, and the late-penalty formula.
Keep small-loan pricing within the 6%/mo nominal and 15%/mo all-in thresholds; configure systems to block out-of-policy pricing.
Cap late penalties at ≤5%/mo of the unpaid amount; avoid duplicative default interest.
Require separate, conspicuous consent for any compounding (or avoid compounding altogether).
Embed fair collection SOPs and audit trails.
Minimize app permissions; never harvest contacts.
Train staff to handle recomputation requests and document any concessions.

9) Frequently asked questions

Q1: Can an online lender legally charge 10% per month if the borrower agrees? For small loans (≤₱10,000, ≤4 months), no—that breaches the monthly cap and almost certainly the 15% all-in ceiling. For larger/longer loans (outside the capped bucket), there’s no fixed ceiling, but courts can still cut down a 10%/month rate as unconscionable, especially if there are added fees or compounding.

Q2: Is a “processing fee” outside the cap? No. For capped small loans, all finance charges (except late penalties) are counted toward the 15%/month all-in limit.

Q3: Can the lender charge interest on unpaid interest? Only if explicitly agreed in writing. Even then, courts may disallow or reduce it if oppressive.

Q4: If the contract is silent on interest, what applies? 6% per annum legal interest typically applies from default or judicial demand.

Q5: Can a lender message my contacts? Contacting third parties to pressure payment risks privacy violations and unfair collection sanctions. Borrowers can complain and seek damages.

10) Model clause language (illustrative only)

Interest: “The Loan shall bear interest at X% per month, simple, non-compounding.”
Fees (capped small loans): “All finance charges inclusive of interest and fees shall not exceed 15% per month of the principal.”
Late penalty: “A late payment penalty of up to 5% per month of any unpaid amount, computed pro-rata by day, applies after due date.”
No harassment: “Collections shall comply with fair debt collection and data privacy laws; no third-party disclosures without lawful basis.”
Repricing/recomputation: “If any charge is found unlawful or unconscionable, the parties agree to recompute at the legal interest of 6% p.a. for the affected period.”

Bottom line

For online loans in the Philippines, freedom to contract on interest is tempered by (1) hard caps for small, short-term loans; (2) Truth-in-Lending disclosures; (3) court power to reduce unconscionable rates and penalties; (4) a default 6% p.a. legal interest when stipulations fail; and (5) strict privacy and fair collection rules that apply with equal force online.