Legal Protections Against Usurious Loans and Property Pawn in the Philippines

(A comprehensive doctrinal and regulatory survey as of 2 August 2025)

1. Introduction

Credit makes commerce flow, but abusive interest rates and predatory collateral arrangements undermine social justice and financial inclusion. Philippine law addresses the problem on several fronts: (a) statutory ceilings and disclosure rules; (b) civil-law doctrines allowing courts to strike down unconscionable stipulations; (c) special regimes for pawnshops and lending companies; and (d) a growing body of administrative regulation aimed at micro-credit and digital lenders.

2. Historical Bedrock: The Usury Law and Its Suspension

Milestone	Key Points
Act No. 2655 (Usury Law, 1916, as amended)	Originally fixed maximum interest (e.g., 12 % p.a. on secured loans, 14 % on unsecured) and criminalized violations.
Central Bank Circular 905 (22 Dec 1982)	Suspended the fixed ceilings “until otherwise prescribed….” It did not repeal the Usury Law—only its numerical caps.
Practical effect	Lenders may contract for any rate subject to: (1) written stipulation (Civil Code art. 1956) and (2) judicial power to strike down rates that are “iniquitous or unconscionable.”

2.1 Civil-Code Safety Valves

Article 1229 – Courts may reduce liquidated damages (including interest labelled as “penalty”) if they are “evidently inequitable.”
Article 2227 – Exemplary damages may be awarded for gross bad faith in demanding usurious interest.
Article 1363 – Reformation of written instruments if they do not express the true intent of the parties.

2.2 Key Supreme Court Jurisprudence

Case	G.R. No. / Date	Holding on Usury
Medel v. Court of Appeals	131622, 27 Nov 1998	5.5 % per month (≈ 66 % p.a.) declared unconscionable; interest reduced to 12 % p.a.
Castro v. Tan	168940, 15 Feb 2012	7 % per month “clearly iniquitous”; reduced to 12 % p.a.
Spouses Abella v. Abella	176611, 16 Jan 2013	6 % per month struck down; court supplied legal rate.
Macalinao v. BPI Family Savings	187021, 13 Mar 2013	Reinforced rule that unconscionable interest may be nullified even without plea by debtor.

Courts now routinely treat any rate above ±36 % p.a. as suspect, and anything over ±60 % p.a. as patently void.

3. Statutory Disclosure, Consumer & Lending-Company Regulation

3.1 Truth in Lending Act (RA 3765, 1963)

Requires clear disclosure of effective interest rate, finance charges, and total cost of credit.
Implemented by BSP for banks (Part X of the Manual of Regulations for Banks, “MORB”) and by SEC for non-banks.

3.2 Lending Company Regulation Act (RA 9474, 2007)

All entities in the business of granting loans for their own account (other than banks, pawnshops, cooperatives) must register with the SEC.
Requires minimum ₱1 million paid-in capital (higher in Metro Manila), full-cost disclosure, and prohibits violence, threats, or deceptive collection practices.
Penalties: fine ₱10 000–₱50 000 and/or 6 months–10 years imprisonment for lending without a license; administrative fines up to ₱1 million per violation.

3.3 Financial Products and Services Consumer Protection Act (RA 11765, 2022)

Empowers BSP, SEC and Insurance Commission to issue ceilings on interest and fees when warranted.
Provides administrative penalties up to ₱50 million, restitution, and even criminal liability (up to 5 years) for abusive collection or misleading disclosures.

3.4 Recent Interest-Cap Regulations

Instrument	Scope	Cap / Limit
BSP Circ. 1098 (Sept 2020)	Credit-card issuers	2 % per month (24 % p.a.) interest; 1 % per month penalty on unpaid balance.
BSP Circ. 1133 (Aug 2021)	Payday loans ≤ ₱10 000 and ≤ 4 months tenor (banks & non-banks)	Effective interest ≤ 6 % per month; processing fee ≤ ₱500.
SEC MC 19-2019, MC 10-2022	Online Lending Platforms	Total cost of credit ceiling at 0.8 % per day plus up to 5 % service fee; absolute ban on “contact-scam” style harassment.

4. Pawnshop Regulation: PD 114 and BSP Oversight

4.1 Licensing & Prudential Rules

Presidential Decree 114 (Pawnshop Regulation Act, 1973) classifies pawnshops as “non-bank financial institutions.”
To operate, a pawnshop must secure: (a) BSP Certificate of Authority (renewed every 3 years) (b) Mayor’s permit and DTI/SEC registration (c) Minimum net worth (₱100 000 single unit; ₱1 million for chain operations).

4.2 Interest, Service Charge, and Penalties

Charge	Statutory Maximum (default)
Interest	3 % per month of principal (may be lower if set by BSP Circular).
Service Charge	1 % of principal or ₱5, whichever is higher, but not > ₱30 per transaction.
Default Penalty	1 % per month on principal, counted from maturity date.

(BSP circ. 938-2017 retains the statutory maxima but allows lower caps for micro-pawns ≤ ₱5 000.)

4.3 Borrower’s Rights under PD 114

Pawn Ticket – Must state loan amount, description of pawned item, maturity, total charges, name & address of pawnshop.
Grace Period – 90 days after maturity to redeem by paying principal + accrued charges.
Public Auction – Unredeemed items sold; surplus after costs must be returned to pawner within 30 days.
Loss/Theft of Pawned Article – Pawnshop must pay twice the appraised value within 30 days (or deliver a replacement item of equal value) plus refund of interest.
Early Redemption – Allowed anytime on a pro rata interest basis.

4.4 Prohibited Acts & Penalties

“Kabit-system” (rent-a-license) operations, misrepresentation of interest, refusal to issue tickets, and advance dating of tickets are administratively punishable.
Criminal penalties: fine up to ₱40 000 and/or imprisonment 6 months–2 years.
BSP may suspend or revoke license for repeated violations.

5. Property as Collateral: Civil-Law Safeguards

Pledge (Arts. 2085–2123, Civil Code) – Delivery of movable; pactum commissorium (automatic appropriation) void (Art. 2088).
Chattel Mortgage (Act No. 1508) – Requires affidavit of good faith and registration; foreclosure only via public auction.
Real-Estate Mortgage (Arts. 2085 et seq.; Act 3135) – Foreclosure must follow statutory notice and auction requirements; debtor’s right of redemption within 1 year (for extra-judicial foreclosure).
Sale with Right to Repurchase (Pacto de Retro, Arts. 1601-1618) – Permitted but redemption period strictly construed; courts look closely at substance to prevent disguised loans with usurious features.
Anti-Dummy / Anti-Profiteering – Constitution Art. XII § 14 requires JUST distribution of agricultural land; excessive collateral forfeitures may be struck as contrary to public policy.

6. Unfair Debt Collection Practices

BSP-Monitored Financial Institutions – Must follow BSP Circular 1166-2023, banning threats, public shaming, and contact of persons outside the borrower’s consent list.
SEC Memorandum Circular 18-2019 – Extends similar prohibitions to lending and financing companies; three strikes may lead to cancellation of license.
Data Privacy Act (RA 10173) – Unconsented disclosure of borrower information to contact list is unlawful processing; hefty fines + imprisonment.
Revised Penal Code arts. 287-292 – Coercion, grave threats and unjust vexation are prosecutable.

7. Administrative & Criminal Remedies for Borrowers

Forum	Cause of Action	Relief
Courts (Civil)	Nullification/reduction of unconscionable interest; refund; damages.
Courts (Criminal)	Prosecution under Usury Law (if rate cap violated by special law), RA 9474, PD 114, RPC threats/coercion.
BSP Consumer Assistance Mechanism	Mediation; administrative fine on supervised entity; directive to refund.
SEC CGFD / Enforcement & Investor Protection Dept.	Administrative cases vs. lending companies; suspension/revocation; cease-and-desist orders; PO (Protective Order) freezing bank accounts.
NPC (National Privacy Commission)	Penalties for doxing or unlawful contact-list scraping.
DTI Fair Trade Enforcement Bureau	Action vs. pawnshops for deceptive practices under Consumer Act if non-BSP licensed.

8. Special Regimes & Emerging Issues

Microfinance NGOs (RA 10693) – Ceiling of 2 % per month on interest; must plough 100 % of profits back into programs.
Agrarian-Reform Beneficiary Loans – LandBank & DBP concessional rates; mortgaged land cannot be foreclosed without DAR clearance.
Islamic Financing (RA 11439) – Murabaha and Ijara modes exempt from usury concepts but still subject to disclosure and consumer-protection rules.
FinTech & BNPL (Buy-Now-Pay-Later) – BSP-SEC Joint Circular 1-2024 promises a unified cap formula based on Annual Percentage Rate (APR) and Total Cost of Credit (TCC); enforcement piloted 2025.
Crypto-Backed Loans – Currently unregulated as collateral per se, but lending platforms must still be SEC-licensed and comply with interest caps.

9. How Courts Determine “Unconscionable Interest” Today

Benchmarking – Courts look at statutory caps (e.g., PD 114’s 3 %/mo, BSP 2 %/mo credit cards) and prevailing bank rates (~6 %–12 % p.a.).
Purpose of Loan – Consumption vs. commercial; emergency vs. investment.
Bargaining Power & Disclosure – Adhesion contracts, small-font clauses, or oral promises increase likelihood of reduction.
Totality of Charges – Service fees, penalties, and hidden “handling” costs are aggregated; nominal interest may be struck even if “only 2 %” when effective APR > 60 %.

10. Best Practices for Borrowers & Practitioners

Insist on Written Disclosure (RA 3765).
Compute Effective Annual Rate – Add all fees and penalties.
Redeem Pawn Early – Interest is pro-rated under PD 114.
Document Harassment – Screenshots/recordings support NPC or SEC complaints.
File for Judicial Intervention Promptly – Courts may issue TROs against foreclosure or public auction of pawned goods.

11. Conclusion

While numerical usury ceilings have been suspended for over four decades, the Philippine legal order has evolved a layered defense: statutory caps for specific sectors, strong disclosure rules, civil-law doctrines against unconscionability, and an increasingly assertive regulatory stance toward digital-age lenders. Borrowers who understand these protections—and invoke them—can resist predatory interest and safeguard their property.

Disclaimer: This article is for academic and informational purposes only and does not constitute legal advice. For specific cases, consult a qualified Philippine lawyer.