Legal Limits on Loan Interest Rates in the Philippines

(A practitioner-style explainer as of September 25, 2025; general information, not legal advice)

1) Executive snapshot

There is no across-the-board statutory “interest cap” for private loans in the Philippines. The Usury Law (Act No. 2655) remains in force but its ceilings have been suspended by Central Bank (CB) Circular No. 905 (1982)—now carried forward under the Bangko Sentral ng Pilipinas (BSP) regime.
Interest must be expressly written (Civil Code Art. 1956).
Courts routinely strike down or reduce “unconscionable” rates and penalty charges using the Civil Code (Arts. 1229, 2227, 1306) and equity; the freedom to contract is not absolute.
Special caps and conduct rules exist for particular lenders/products (e.g., credit cards, small-value digital loans, pawnshops, microfinance/NGO lending), and mandatory disclosure applies under the Truth in Lending Act (RA 3765) and Financial Consumer Protection Act (RA 11765).
“Legal interest” for court awards (i.e., the rate courts use when they award interest on a judgment or forbearance of money) is governed by jurisprudence and BSP circulars—6% per annum has been the prevailing benchmark for post-2013 periods under Nacar v. Gallery Frames.

2) Sources of law & regulatory architecture

Civil Code
- Art. 1956: Interest is not due unless expressly stipulated in writing.
- Art. 1306: Parties may stipulate terms not contrary to law, morals, good customs, public order, or public policy.
- Arts. 1229 & 2227: Courts may reduce penal clauses and liquidated damages if iniquitous or unconscionable.
Usury Law (Act No. 2655)
- Historically set ceilings, but these ceilings were suspended by CB Circular No. 905 (Dec. 22, 1982).
- The law was not repealed; it is a backdrop for abuse doctrines and criminal usury concepts if ceilings are ever re-imposed.
Bangko Sentral ng Pilipinas (BSP)
- BSP Charter (RA 7653, as amended by RA 11211): BSP regulates banks, quasi-banks, credit card issuers (if bank-issued), pawnshops, money service businesses, and payment system operators.
- May set product-specific caps (e.g., credit card finance charges) and conduct rules (disclosure, collection practices).
Securities and Exchange Commission (SEC)
- Oversees lending companies (RA 9474) and financing companies (RA 8556), including online lending platforms.
- Can fix ceilings for defined small-value loans and enforce disclosure/collection standards.
Other key statutes
- Truth in Lending Act (RA 3765): Requires disclosure of finance charge and effective interest rate (EIR).
- Financial Consumer Protection Act (RA 11765): Prohibits abusive collection, hidden fees, and misrepresentation across BSP/SEC/CDA jurisdictions; enhances remedies.
- Pawnshop Regulation Act (PD 114) and BSP regulations: Pawnshops are a special category with prescribed disclosures and standard contract terms.
- Microfinance NGOs Act (RA 10693): Framework for microfinance NGOs, focusing on poor and low-income clients, with reporting and transparency obligations.
- Cooperative Code (RA 9520): Member loans by credit cooperatives are governed by cooperative rules and CDA supervision.

3) The general rule: No fixed ceiling, but guardrails apply

Because CB Circular No. 905 suspended numerical caps, Philippine law defaults to freedom to contract: parties may agree on any interest rate so long as the stipulation is in writing and not unconscionable or contrary to public policy.

How courts police “unconscionable” rates

The Supreme Court has repeatedly voided or pared down exorbitant rates and penalties. While case outcomes turn on facts, guiding themes recur:

Substance over labels: Courts look at effective charges—interest, service fees, penalties, advance deductions, and add-on structures—to gauge overall burden.
Equitable reduction: Even if a rate was valid when agreed, courts may reduce it if later found iniquitous considering duration, amount, bargaining power, and circumstances of default.
Penalty vs. compensatory interest: Penal rates (e.g., default interest, late charges) are distinct and more readily trimmed than compensatory rates.

Illustrative jurisprudence (selection):

Medel v. Court of Appeals, G.R. No. 131622 (27 Nov 1998): Supreme Court struck down a 5.5% monthly (66% p.a.) rate as excessive and reduced it equitably.
Neri v. Heirs of Hadji Yusop, G.R. No. 138239 (June 27, 2000): Reinforced the court’s power to strike down unconscionable interest.
Spouses Toring v. Spouses Olan, G.R. No. 151911 (Aug 4, 2005); Chua v. Timan, G.R. No. 187583 (Nov 11, 2013); Lara’s Gifts v. Midtown, G.R. No. 225433 (Jan 30, 2019): Series of cases where the Court reduced interest and/or penalties deemed excessive.
Nacar v. Gallery Frames, G.R. No. 189871 (Aug 13, 2013): Set the 6% per annum legal interest (see §7) going forward.

Practice tip: The more the total burden (interest + fees + penalties + compounding) veers toward economic coercion, the more likely a court will slash it.

4) Written stipulation is mandatory

Absent a written stipulation, no interest is due (Civil Code Art. 1956).
If parties agree orally or imply an interest rate, a court may award legal interest (6% p.a.) only from judicial or extrajudicial demand depending on the claim’s nature, but not a contractual rate.

5) Special product- and sector-specific regimes

A. Credit cards (BSP-regulated)

BSP may impose caps on finance charges (e.g., a maximum monthly rate for revolving credit) and fees (e.g., cash advance charges).
Issuers must compute and disclose EIR, avoid misleading marketing, and observe fair collection rules.
The exact numerical caps are periodically adjusted by BSP. Check the latest BSP circular applicable on the transaction date for the current monthly rate and fee caps.

B. Small-value consumer loans via lending/financing companies (SEC-regulated)

The SEC has authority to cap rates for defined small-value, short-tenor loans, including those booked through online lending platforms (OLPs).
Typical elements include a cap on nominal monthly interest, a cap on EIR (which includes all finance charges), and a cap on penalties.
Always confirm: (i) date of loan, (ii) principal amount (e.g., ≤ ₱10,000 thresholds are common), and (iii) tenor (e.g., ≤ 4 months) because caps may apply only within those bands.

C. Pawnshops (BSP-regulated; PD 114)

Rates are market-determined but strict disclosures and standard ticket terms are required.
Charges often appear as “advance interest” and “service charge”; BSP prescribes formatting and visibility standards and grace periods for redemption/sale.
Local ordinances sometimes add consumer-protection rules (e.g., display requirements) but National rules govern rates and disclosures.

D. Microfinance NGOs (RA 10693) and cooperatives (RA 9520)

Microfinance NGOs may price to cover costs for high-touch, small-ticket lending, subject to reporting and transparency; their charters emphasize poverty alleviation over profit.
Credit cooperatives, lending only to members, set rates via bylaws and board policies, subject to CDA oversight and general consumer-protection standards.

6) Penalty interest, late fees, service charges, and compounding

Penalty rate (default interest) is separate from regular interest. Excessive penalties are frequently reduced.
Late fees and non-interest charges (processing, service, collection) are counted toward EIR under TILA/SEC/BSP rules.
Compounding (interest on interest) must be expressly agreed and is scrutinized for fairness; many courts disallow compounding during default or post-maturity absent clear stipulation.

7) “Legal interest” vs. contractual interest

Contractual interest: Whatever the parties validly agreed to in writing, subject to unconscionability review.
Legal interest: The rate courts apply by default on loans/forbearance of money and judgments when a contractual rate is invalid, absent, or ceases to apply.
Under Nacar v. Gallery Frames (2013): 6% per annum is the benchmark legal interest from July 1, 2013 onwards (superseding the older 12%).
Accrual mechanics depend on the claim type**:**
- Loans/forbearance: From default or judicial/extrajudicial demand.
- Damages (unliquidated): From judgment (unless otherwise directed).

8) Compliance checkpoints for lenders and borrowers

For lenders (banks, financing/lending companies, OLPs, pawnshops, coops):

Put the rate in writing. Quote both nominal rate and EIR; itemize fees.
Stay within any applicable caps. Especially for credit cards and small-value/short-tenor loans that are subject to SEC caps.
Use compliant disclosures. RA 3765 and BSP/SEC templates require clear, conspicuous APR/EIR and total cost.
Mind collection conduct. RA 11765 penalizes harassment, doxing, deceptive contact scraping, and shaming.
Document consent for auto-debit, data processing, and e-signatures (E-Commerce Act, Data Privacy Act).
Keep records for audits and dispute resolution.

For borrowers (consumers and MSMEs):

Look at EIR, not just the sticker rate. Add up processing, service, platform, disbursement, and collection fees.
Watch penalties. Anything above a modest monthly default charge is at risk of being trimmed by courts.
Flag hidden compounding. If not plain in the contract, challenge it.
Preserve proof of payments and communications; it matters in equitable reduction cases.

9) Common scenarios

“5-6” informal lending (e.g., 20% per month): Not automatically illegal because no general cap, but often voidable/reduced as unconscionable; may also violate licensing (RA 9474) and consumer-protection rules, and expose lenders to criminal/civil liability for abusive collection.
Online lending apps: Must be SEC-registered (as lending/financing company and/or OLP); rate caps can apply to small-value loans; contact-list scraping and public shaming are sanctionable.
Business-to-business (B2B) supplier financing: Generally uncapped, but unconscionability and TILA-style disclosure (if product falls within scope) still matter; courts disfavor punitive default terms.
Pawnshop loans: Usually short-term, secured, with high headline monthly rates but standardized disclosures; redemption mechanics are tightly regulated.

10) Checklist for validating an interest clause

Is it written and signed? (Civil Code Art. 1956)
Is there a special cap applicable to this product/issuer/amount/tenor on the transaction date (credit card, small digital loans)?
Are all fees disclosed and rolled into EIR/APR? (RA 3765)
Are penalty rates and late fees reasonable and non-compounding, unless clearly authorized?
Does the contract avoid “advance deductions” that spike the effective cost?
If litigated, would a judge call this unconscionable? Benchmark against cases where rates were trimmed.
If the contractual rate fails, do you understand when 6% legal interest will take over and from when it accrues?

11) Drafting pointers (sample clauses & notes)

Interest clause (compensatory): “The Loan shall bear interest at X% per month (Y% per annum) on the outstanding principal, simple interest, computed on a [30/360 or actual/365] day-count basis.”
Penalty clause (default): “Upon default, an additional penalty interest of Z% per month shall accrue on the overdue amount only, simple (non-compounding), until cure.” Note: Keep Z modest; courts are quick to reduce high default penalties.
No compounding unless explicit: “Interest shall not compound, and interest on unpaid interest shall not accrue, unless expressly stated and permitted by applicable law.”
Disclosure cross-reference: “The parties acknowledge receipt of the Disclosure Statement required under RA 3765, which sets out the EIR/APR, finance charges, and total payments.”
Savings clause: “If any interest or charge is determined to be contrary to law or unconscionable, the parties agree that such charge shall be reduced to the maximum lawful amount, with excess treated as payment of principal.”

12) Enforcement, defenses, and remedies

For lenders: Breach actions for sum of money, foreclosure on collateral, and damages/attorney’s fees if stipulated.
For borrowers:
- Unconscionability defense and petition for equitable reduction of interest/penalties.
- Counterclaims under RA 11765 for abusive collection, and Data Privacy Act violations.
- Regulatory complaints with BSP, SEC, or CDA (depending on the entity).
- Criminal/administrative exposure for unlicensed lending and harassment.

13) Practical takeaways

There is no universal cap, but many real-world loans are capped by sectoral rules (credit cards, small digital loans) or courts through unconscionability review.
The safest posture is transparent pricing, clear written stipulations, modest penalties, and full TILA-compliant disclosure.
On disputes, focus on EIR, penalty structure, compounding, and collection conduct; these are where courts most often intervene.

14) Quick reference (by issue)

Is any interest due if nothing is written? No. (Civil Code Art. 1956)
Can parties agree to any rate? Generally yes, but subject to reduction if unconscionable.
What if the agreed rate is void or silent? Courts apply legal interest (6% p.a.) per Nacar.
Are fees part of the “rate”? For disclosure and caps, regulators look to EIR (interest plus finance charges).
Do caps exist at all? Yes—product-specific (e.g., credit cards) and small-value SEC-capped loans.
Can lenders harass or shame debtors? No. Prohibited under RA 11765 and related rules.

Final note

Rules for credit card pricing and small-value digital loans are actively adjusted by regulators. For a specific transaction, verify the governing BSP/SEC circular in effect on the loan date, and align your contract and disclosures accordingly.