(Comprehensive explainer for practitioners, lenders, and borrowers)

1) The Big Picture

There is no across-the-board statutory “maximum interest rate” for private loans in the Philippines. The Usury Law (Act No. 2655) technically still exists, but all ceilings were suspended by Central Bank policy in the early 1980s.
Courts will honor freedom of contract on interest unless the rate is unconscionable or violates consumer-protection rules.
If no interest is stipulated, a 6% per annum “legal interest” generally applies in cases of loans or forbearance of money, and in many money judgments, under modern Supreme Court doctrine.
Sector-specific caps and conduct rules (e.g., credit cards, certain small-value/micro-loans, and consumer-finance products) can and do apply by regulator circulars. These sit on top of the general civil-law rules.

2) Core Legal Sources & Doctrines

A. Usury Law & Regulatory Suspension

Act No. 2655 (Usury Law): Earlier fixed ceilings on interest.
Central Bank/BSP policy (since 1982): Ceilings suspended, leaving pricing to market forces subject to (i) civil-law limits (unconscionability, good faith), and (ii) regulatory caps for specific products when imposed.

Practical upshot: There is no single “legal maximum rate.” But a high rate can still be struck down as unconscionable case-by-case, and administratively capped in regulated niches.

B. Stipulated (Conventional) Interest vs. Legal (Judicial) Interest

Conventional/Stipulated interest: The parties’ agreed rate in the contract (e.g., 2%/month). Enforceable if (i) validly disclosed/assented to, (ii) not unconscionable or illegal, and (iii) not barred by a specific cap.
Legal interest: A default or judicially imposed 6% p.a. that applies when (i) no rate is stipulated on a loan/forbearance, or (ii) interest is awarded as damages (e.g., for delayed payment) under civil-law rules.

C. Supreme Court Landmarks (Simplified)

Unconscionability rule: Even with ceilings suspended, courts can strike down or reduce a rate that is excessive, iniquitous, or shocking to conscience (classic examples: 3%–6% per month and higher have repeatedly been curtailed).
Modern legal interest = 6% p.a.: The Court standardized the legal rate at 6% (superseding older 12% rules).
When 6% applies (quick guide):
- Loans/forbearance with no valid rate: 6% p.a. from demand (extra-judicial or judicial), or as otherwise specified by jurisprudence.
- Damages not involving a loan/forbearance: 6% p.a. usually from the date of judgment (or from demand if the amount was reasonably ascertainable earlier).
- From finality of judgment to satisfaction: 6% p.a. on the total award (principal + accrued interest), regardless of the nature of the claim.

Practice tip: Always track (1) nature of the obligation, (2) presence/validity of a stipulated rate, and (3) the timeline (demand, filing, judgment, finality). The start date for interest accrual often turns on these.

3) Drafting & Enforceability: What Makes a Rate Stick?

A. Clear, Written, Informed Assent

Put the rate in writing (principal instrument or clearly cross-referenced annex).
Disclose the effective cost of credit (finance charges, fees, add-ons) in a manner a reasonable consumer understands.
Ensure prominence: no burying rates in fine print; use plain language and sample computations.

B. Reasonableness & Proportionality

Even without statutory ceilings, courts look at:
- Rate level vs. risk profile (collateralized vs. unsecured; commercial vs. consumer; SME vs. payday).
- Comparators (prevailing bank rates; regulator guidance for similar products).
- Total cost of credit (interest plus fees, penalties, “add-on” pricing).
- Debtor vulnerability (consumer, low-income, emergency credit).
Red flags for unconscionability: “Ballooning” effective rates via compounding, layered fees, daily penalties, or rates that multiply principal in months.

C. Compounding (Interest-on-Interest / “Anatocism”)

Interest does not earn interest unless there is an express, written stipulation, and only on due and unpaid interest (courts scrutinize this).
If allowed, specify when compounding starts, how often (e.g., monthly), and on what base (interest due but unpaid), and keep it reasonable.

D. Penalties, Default Interest, and Liquidated Damages

Penalty clauses (e.g., extra 1–3%/month upon default) are common but subject to reduction if iniquitous or unconscionable.
Avoid stacking: If you already have a high base rate, adding steep default interest and heavy penalties invites judicial trimming.
Make penalties proportional to administrative costs/collection risks and cap them.

E. Accrual Triggers & Demands

Spell out when interest starts (date of release? date of default?), what counts as demand, and how partial payments are applied (see allocation below).

4) Allocation of Payments & Application Order

A standard, defensible waterfall (state it expressly):

Costs/Fees actually incurred and due;
Accrued interest to date;
Principal balance.

Courts often follow this order when the contract is clear. Absent clarity, allocation controversies tend to be resolved against the drafter.

5) Consumer-Protection & Sector-Specific Caps

Truth in Lending principles require clear disclosure of the finance charge and effective rate; lenders should provide key fact statements and sample amortization tables.
Financial consumer protection law empowers regulators (BSP for banks/e-money/credit cards; SEC for lending/financing companies; IC for insurers) to issue rate caps, fee limits, and conduct rules—especially for credit cards and small-value loans.
Practical effect:
- Credit cards: A regulatory monthly cap on interest and certain fees has been in force in recent years.
- Small-value/micro-loans: In practice, caps on monthly nominal/EIR and limits on penalties/fees have been implemented by the appropriate regulator.
These administrative caps change over time; professionals should check the latest circulars before pricing.

6) Common Litigation Patterns & Benchmarks

3%–6% per month (36%–72% p.a.): Frequently found unconscionable in consumer or small-business contexts, especially with additional penalties or compounding.
1%–2% per month: More defensible for commercial credit, but still subject to context and disclosure quality.
No stipulated rate: Courts will generally impose 6% p.a. from demand (loan/forbearance), or from judgment (non-loan damages).
Penalty trimming: Courts commonly reduce default interest and penalties to reasonable levels, sometimes consolidating everything into a single 6% p.a. from a specific date.

7) Compliance Checklist for Lenders

Licensing & supervision: Confirm you are operating under the correct regulator (BSP banks/quasi-banks; SEC lending/financing cos.; cooperatives; etc.).
Product mapping: Identify whether a sector cap applies (e.g., credit card, small-value consumer loan).
Clear rate & APR/EIR: State nominal rate and effective rate with examples.
Fees: Enumerate (processing, documentary, late charges, prepayment fees) and guard against fee-stacking.
Compounding: If any, expressly stipulate and keep intervals reasonable.
Default regime: Specify grace periods, penalty rate, cap/ceiling for total penalties, and cure mechanics.
Allocation of payments: Include the costs → interest → principal waterfall.
Collections conduct: Adopt written fair-collection standards; prohibit harassment or disclosure to third parties.
Data privacy: Ensure consent is specific, informed, time-bound, and proportionate; no phone-book scraping or contact-list blasting.
Record-keeping: Keep disclosures, signed contracts, payment histories, and communications for audit and court.

8) Borrower Protections & Practical Tips

Ask for the Key Facts page: principal, term, total finance charge, all-in effective rate, fees, and worst-case default math.
Watch for compounding and daily penalties: small percentages can snowball.
Prepayment rights: Clarify if allowed, and whether prepayment penalties apply (and how they’re computed).
Receipts & ledgers: Keep everything; disputes often turn on dates and allocation of payments.
Harassment & data misuse: There are administrative and civil remedies for unfair collection and privacy violations.

9) How Courts Calculate: A Quick Decision Tree

Is there a valid written rate?
- Yes: Apply it unless unconscionable or capped by regulation.
- No: Apply 6% p.a. as legal interest (loan/forbearance).
Is compounding stipulated (and reasonable)?
- Yes: Enforce as written (courts may still moderate).
- No: Simple interest only.
Default/penalty rate present?
- Yes: Enforce subject to reduction if iniquitous or duplicative.
- No: Base rate + any judicial interest as applicable.
From when?
- Loan/forbearance: Usually from demand (or as the contract states).
- Damages (non-loan): Typically from judgment; sometimes from earlier demand if amount was ascertainable.
After finality of judgment: 6% p.a. on the total award until paid.

10) Sample Clauses (Illustrative Only)

Interest Rate. The Loan shall bear interest at 1.50% per month (18% p.a.), computed on a simple basis, from [release date] until full payment. Compounding. No compounding shall apply. (If compounding is intended, state frequency and base explicitly.) Default Interest & Late Charge. Upon default persisting beyond a [10-day] grace period, interest increases by 1% per month on the unpaid principal; a one-time late charge of ₱[●] or [●]% (whichever is lower) applies. Total penalties shall not exceed [●]% of principal. Allocation of Payments. Payments apply in this order: (i) costs/fees due; (ii) accrued interest; (iii) principal. Prepayment. Borrower may prepay without penalty; interest accrues only up to the date funds are received. Disclosure. Lender has provided the Key Facts Statement with sample computations and the effective annual rate; Borrower acknowledges receipt.

(Adjust to any sector-specific caps.)

11) Frequently Asked Questions

Q1: Is 5% per month legal? There is no universal cap, but 5%/month (60% p.a.) is high-risk for being unconscionable, especially in consumer or small-business contexts or if combined with penalties/compounding.

Q2: The contract is silent on interest—what applies? Courts typically impose 6% p.a. (legal interest) from demand for loans/forbearance.

Q3: Can interest be capitalized monthly? Only if expressly, clearly, and reasonably stipulated. Courts scrutinize frequent compounding and may curtail it.

Q4: Are there any hard caps today? Yes, in specific product categories (e.g., credit cards and some small-value consumer loans). These are regulatory (not statutory) and change over time, so check current circulars for the exact figures when pricing a product.

Q5: Can the court reduce my agreed rate and penalties? Yes—if found unconscionable, excessive, or duplicative, courts may trim rates/penalties and consolidate the award under the 6% p.a. judicial rate from the appropriate date.

12) Action Points

For lenders: Price within market-reasonable bands, document clear disclosure, and audit products against the latest regulator caps and SC doctrine.
For borrowers: Demand a Key Facts Statement, compute the all-in EIR, and resist stacked fees and open-ended penalties.
For counsel: Pin down the nature of the obligation, dates, and paper trail, then apply the 6% p.a. framework and unconscionability analysis.

Final Note

This guide distills the prevailing Philippine framework: **contractual freedom bounded by fairness, a default 6% p.a. legal interest rule, and targeted regulatory caps. Because circulars and caps evolve, always confirm the current product-specific guidance before finalizing rates or litigation positions.