In the Philippines, the landscape of lending is often misunderstood as a "wild west" where creditors can charge whatever they please. While it is true that the Usury Law (Act No. 2655) is currently "legally asleep," it is not dead. The Philippine legal system maintains a delicate balance between the freedom of contract and the protection of borrowers from predatory lending practices.
1. The Current Legal Framework
For decades, the Philippines enforced strict interest rate ceilings. However, in 1982, the Central Bank issued CB Circular No. 905, which suspended the Usury Law.
- Freedom to Stipulate: Under the principle of autonomy of contracts (Article 1306, Civil Code), parties are generally free to establish such stipulations, clauses, terms, and conditions as they may deem convenient.
- The "No Ceiling" Rule: As of today, there is no legislated "maximum" interest rate for most private loans. Creditors and debtors can agree on a 5%, 10%, or even 24% annual interest rate.
2. The Doctrine of Unconscionable Interest
Just because there is no statutory ceiling does not mean the sky is the limit. The Supreme Court of the Philippines has consistently ruled that interest rates that are "excessive, iniquitous, unconscionable, and exorbitant" are void.
Even if a borrower voluntarily signs a contract agreeing to a massive interest rate, the court can step in to invalidate that specific provision. The logic is simple: a contract is not a license to strip a person of their property or dignity through debt.
What is considered "Unconscionable"?
While the court decides on a case-by-case basis, jurisprudence has established several benchmarks:
- 3% per month (36% per annum): Often flagged as excessive in various landmark cases (e.g., Medel vs. Court of Appeals).
- 6% per month (72% per annum): Almost universally declared void and "contrary to morals" by the Supreme Court.
Note: When a court declares a stipulated interest rate void for being unconscionable, the interest rate is not reduced to zero. Instead, it is typically replaced by the Legal Interest Rate.
3. The Legal Interest Rate (Bangko Sentral ng Pilipinas)
When a contract fails to specify an interest rate, or when the specified rate is struck down by a court, the Legal Interest Rate applies.
As per BSP-MB Circular No. 799 (Series of 2013), the legal interest rate for the following is 6% per annum:
- Loans or Forbearances of money, goods, or credits.
- Judgments (when the court orders payment and it becomes final and executory).
| Scenario | Applicable Rate |
|---|---|
| Agreed Rate (Fair) | Whatever is written in the contract |
| Agreed Rate (Unconscionable) | Reverted to 6% per annum |
| No Agreed Rate | 6% per annum |
4. Compounding Interest (Anatocism)
Under Article 1959 of the Civil Code, interest due and unpaid shall not earn interest. However, there are two exceptions where compounding interest is legal:
- When there is an express written stipulation in the contract that unpaid interest shall be added to the principal and earn further interest.
- When the debt is judicially demanded (a lawsuit is filed).
5. Essential Requirements for Interest to be Valid
For a creditor to legally collect interest in the Philippines, three conditions must be met:
- Must be Expressly Stipulated: Interest cannot be "assumed." If the contract doesn't mention interest, none is due (Art. 1956, Civil Code).
- Must be in Writing: An oral agreement to pay interest is generally unenforceable in court.
- Must Not be Contrary to Law or Morals: As discussed, it must not be unconscionable.
6. The "Form of Adhesion" Warning
Many loan agreements are Contracts of Adhesion—meaning they are prepared solely by the lender (like a bank or a lending app), and the borrower's only choice is to "take it or leave it."
The Supreme Court exercises extra caution with these. If the terms are heavily biased against a borrower who had no power to bargain, the courts are even more likely to strike down high interest rates.
Summary
While the Philippines does not have a "Usury Law" ceiling, the judiciary acts as a safety net. If you find yourself in a contract with an interest rate that feels predatory, the law provides the means to have that rate reduced to the prevailing legal rate of 6% per annum, provided the court finds it "iniquitous and unconscionable."
Would you like me to draft a sample demand letter or a formal clause that incorporates these legal interest standards for a loan agreement?