Legal Limits on Interest Rates for Loan Apps in the Philippines

(A practitioner’s guide for founders, compliance teams, and counsel)

1) The Big Picture

There is no blanket “usury ceiling” in the Philippines since Central Bank Circular No. 905 (1982) effectively lifted interest-rate ceilings under the Usury Law.
But today’s landscape isn’t laissez-faire: sector regulators now impose targeted caps, conduct rules, and disclosure standards—especially for small, short-term loans typically offered by loan apps—and courts still strike down “unconscionable” rates and fees.

Key idea: Pricing must comply with (a) specific regulatory caps where they exist, (b) full-cost transparency and fair-dealing rules, and (c) civil-law limits against unconscionable stipulations.

2) Who Regulates What?

SEC (Securities and Exchange Commission) – primary regulator of Lending Companies (R.A. 9474) and Financing Companies (R.A. 8556), including their online lending platforms (OLPs).
BSP (Bangko Sentral ng Pilipinas) – banks, electronic money issuers, and credit card issuers; sets credit-card rate caps and truth-in-lending rules for supervised entities.
NPC (National Privacy Commission) – data-privacy compliance (R.A. 10173).
DTI – consumer trade practices for entities under its ambit.
Courts – review of “unconscionable” interest, penalty, and fee stipulations.

Newer framework: R.A. 11765 (Financial Consumer Protection Act, 2022) fortifies regulators’ powers (BSP/SEC/IC/DTI) to set ceilings, stop abusive practices, and sanction violators.

3) The SEC’s Targeted Cap for Typical “Loan App” Products

Who is covered? SEC-supervised lending and financing companies and their OLPs (not banks), when they offer small, short-term consumer loans—the core of many loan apps.

The cap (small-loan segment):

Loan size: Up to ₱10,000
Term: Up to 4 months
Ceilings:
- Nominal interest: Up to 6% per month (i.e., roughly 0.2% per day).
- Total effective cost of borrowing (EIR): Up to 15% per month.
- Late-payment penalties: Up to 5% per month on amounts due and unpaid.

What counts toward the 15% EIR cap?

Interest + all finance charges and fees that are incident to credit (e.g., service/processing fees, documentary fees, disbursement/“convenience” fees, in-app “transaction” fees, collection fees passed to the borrower, etc.).
Excluded: Government-imposed charges (e.g., taxes) and late-payment penalties (which have their own 5%/month ceiling).

Anti-avoidance:

Bundling or slicing the same credit into multiple concurrent small loans, mandatory add-ons, or front-loaded fees that defeat the cap can be treated as evasion and sanctioned.
Rollover/refinancing schemes are scrutinized for fee stacking that would push the effective monthly rate above 15%.

Disclosure: SEC requires clear, prominent disclosure of the nominal rate, EIR, all fees, amortization, due dates, and penalties before the borrower commits (and within the contract/receipt).

4) Credit Cards (for comparison)

Although not “loan apps,” many users compare pricing:

BSP sets a separate, nationwide credit-card cap on monthly finance charges and late fees (figures change over time by Monetary Board resolution). These caps do not govern SEC-supervised lending apps, but they influence what regulators and courts consider reasonable consumer pricing.

5) When There’s No Specific Cap (Larger Loans, Longer Terms, or Non-Covered Lenders)

For loan products outside the SEC small-loan bracket (e.g., > ₱10,000 or > 4 months), or for entities outside a specific cap:

Truth in Lending still applies: interest and all finance charges must be clearly disclosed up front, including EIR/APR-style presentation and the peso cost of credit.
Civil Code checks:
- Article 1956: interest must be expressly stipulated in writing.
- Courts may reduce or nullify unconscionable rates and penalty charges (consistent jurisprudence—e.g., striking down rates in the double-digit monthly range, compounding interest-on-interest without basis, or penalty structures that are punitive rather than compensatory).
Fair dealing / abusive conduct rules under R.A. 11765 and SEC/BSP circulars still apply (misrepresentations, hidden fees, bait-and-switch pricing, abusive collections).

6) Collections, Privacy, and Conduct Rules (Common Traps for Loan Apps)

Debt collection: SEC prohibits abusive collection practices (threats, public shaming, contacting employer or unrelated contacts, profanity, harassment, doxxing).
Data privacy: NPC bars contact-list scraping without a valid legal basis and informed consent; requires purpose limitation, data minimization, and security measures.
Consent & transparency: Privacy notices must be plain-language and specific about data uses (credit scoring, collections, analytics, 3rd-party sharing).
Outsourcing/3P collectors: You remain jointly accountable for contractors’ conduct.

Penalties: Range from license suspension/revocation and administrative fines (SEC/BSP/NPC), to criminal liability in extreme cases (e.g., unauthorized or abusive processing under the Data Privacy Act), plus civil damages.

7) Computing the Caps: Practical How-To

A. Nominal interest (≤ 6% per month)

Compute on the principal outstanding according to the contract (flat vs. declining-balance).
Tip: Use declining-balance to align borrower cost with risk and avoid inflated effective rates.

B. Effective Interest Rate (EIR) (≤ 15% per month)

Build a cash-flow schedule (disbursement net of any upfront fees; borrower’s actual take-home amount).
Add all finance charges and recurring fees.
Solve for the internal rate of return (IRR) at a monthly frequency.
Check: If EIR > 15%/month, lower fees or interest until compliant.

C. Late-payment penalties (≤ 5% per month)

Apply only on past-due amounts; do not compound interest-on-interest unless expressly allowed and lawful.
Keep penalty + default interest within reasonableness standards; courts can reduce excessive defaults.

8) Contract & UX Checklist (for Loan Apps)

Pre-contract screens and KFS (Key Facts Statement):

Loan amount, take-home amount after fees, tenor, installment schedule.
Nominal rate (%/month), EIR (%/month), peso-denominated total cost, fees breakdown.
Due dates, auto-debit/auto-deduct details, cooling-off (if offered), early-repayment policy.
Penalty structure and triggers.
Privacy notice & consents (credit checks, device permissions, data sharing).
Regulatory disclosures: company name, SEC Company Registration No., Lending/Financing Company Authority No., principal office, customer-assistance channels, complaint escalation paths.

Contract terms:

Written stipulation of interest (Civil Code).
No clauses enabling unilateral fee changes without notice and consent.
Clear provisions on refinancing/rollovers (to prevent fee stacking).
Severability and governing law clauses; jurisdiction/venue must not be oppressive.

Operations:

Collections playbook aligned with SEC/NPC rules; call scripts and message templates vetted.
Audit trails for disclosures and borrower consents.
APR/EIR engine embedded in pricing to auto-flag noncompliance.
Vendor management for 3rd-party collectors/scorers.

9) Jurisprudence: “Unconscionable” Pricing

Philippine courts routinely invalidate or reduce interest and penalties deemed excessive, considering:

Relationship between rate and risk, market practice, and bargaining power;
Presence of hidden fees and whether the borrower actually received the full principal;
Stacked penalties/charges (interest on interest, liquidated damages far beyond actual loss). Result: Courts may enforce the principal and a reasonable (lower) interest or legal interest, and strike down the rest.

10) Special Situations

Tips/“discretionary” convenience fees: If functionally required to obtain the loan, they are finance charges and count toward EIR.
Referrals/lead fees charged to borrower: Usually finance charges.
Insurance add-ons: If tied to approval or channelled through the lender, treat premiums/commissions as part of total cost unless truly optional.
Salary-deduct/Employer-partner loans: Watch for coercion and data-sharing risks; still subject to caps if within small-loan scope.
BNPL/embedded credit: If the structure is deferred payment with finance charge, treat as credit (disclosure and fair-dealing rules apply).
Pawnshops/Microfinance: Distinct regimes; don’t assume the SEC small-loan cap applies—verify the governing regulator and circulars.

11) Enforcement & Remedies

Regulatory complaints

SEC: Lending/financing companies & OLPs (rate cap violations, abusive collection, unregistered apps).
BSP: Banks/EMIs/credit-card issuers.
NPC: Data-privacy violations (contact scraping, over-collection, unlawful disclosures).
DTI: Misleading ads, unfair sales practices (where applicable).

Civil actions

To annul or reform unconscionable interest/penalty clauses; damages for abusive conduct or privacy breaches.

Criminal liability

Possible under Data Privacy Act (for egregious processing/unauthorized disclosures), and other special laws.

12) Implementation Playbook (for Compliance Teams)

Classify the product (SEC small-loan bracket vs. non-capped segment; SEC vs. BSP supervision).
Map every peso charged to the borrower; label each as interest, finance charge, penalty, or 3rd-party pass-through.
Automate EIR computation on net disbursement cash flows; block release if EIR > 15%/mo (when cap applies).
Set guardrails:
- Max nominal ≤ 6%/mo (if covered).
- Penalties ≤ 5%/mo on amounts due.
- Total EIR ≤ 15%/mo.
Hard-stop on fee-stacking across rollovers/refis; surface APR/EIR impact in tooling.
Disclosure QA: pre-contract KFS + contract + receipts must reconcile to the penny.
Collections governance: approved scripts only; no contact-list blasting or workplace shaming; escalation matrix.
Privacy program: DPIA for the app, data-minimization, consent logs, vendor DPAs, breach playbook.
Audit & monitoring: periodic file reviews, complaint analytics, and rate-cap dashboards.

13) Bottom Lines

If you’re an SEC-supervised lending/financing company offering small, short-term consumer loans (≤ ₱10,000; ≤ 4 months): keep nominal ≤ 6%/mo, EIR ≤ 15%/mo, late penalties ≤ 5%/mo—with full, plain-language disclosure.
If you’re outside those thresholds or under a different regulator: you still face truth-in-lending, fair-dealing, privacy, and unconscionability constraints.
Paper and UX matter as much as math: most enforcement begins with missing or misleading disclosures and abusive collections, not just a rate number.

Note: Specific caps, formulas, and monetary ceilings may be updated by new circulars or board resolutions. For formal opinions, filings, or enforcement exposure assessments, align your product with the latest SEC/BSP/NPC issuances and jurisprudence and document your computations and disclosures thoroughly.