The surge of Financial Technology (FinTech) in the Philippines has democratized access to credit through Online Lending Applications (OLAs). However, this convenience often comes at a steep price: exorbitant interest rates and hidden fees. Navigating the legality of these rates requires an understanding of the interplay between the lifting of usury ceilings and the regulatory interventions of the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC).
1. The Absence of a General Usury Law
For decades, the Philippines operated under the Usury Law (Act No. 2655), which set strict caps on interest rates. However, in 1982, the Central Bank issued Circular No. 905, which effectively suspended these ceilings.
- Current Default: Generally, there is no "fixed" legal limit on interest rates for most loans, as the law allows parties to mutually agree on the cost of borrowing.
- The "Unconscionable" Doctrine: While there is no statutory ceiling, the Philippine Supreme Court has consistently ruled that interest rates that are "excessive, iniquitous, unconscionable, and exorbitant" are void. Rates ranging from 3% per month (36% per annum) or higher have frequently been struck down by the courts as contrary to morals and public policy (Medel v. Court of Appeals).
2. Mandatory Caps on Small-Value Loans (BSP Circular No. 1133)
Recognizing the predatory nature of many OLAs, the BSP implemented Circular No. 1133 (Series of 2021). This specifically targets "unsecured, short-term cash loans" commonly offered by online platforms.
The Prescribed Ceilings:
| Fee Type | Maximum Allowed Limit |
|---|---|
| Nominal Interest Rate | 6% per month (approx. 0.2% per day) |
| Effective Interest Rate (EIR) | 15% per month (includes all fees/charges) |
| Penalties for Late Payment | 1% per month on the outstanding amount |
| Total Cost Cap | Fees/interest cannot exceed 100% of the principal |
Note: These caps apply to "covered" lending and financing companies—specifically those offering small-value, short-term loans to the general public via digital platforms.
3. Transparency and Disclosure Requirements
Under the Truth in Lending Act (Republic Act No. 3765) and SEC Memorandum Circular No. 7 (Series of 2019), OLAs are legally required to provide full transparency before a loan is consummated.
- Disclosure Statement: Borrowers must be shown a clear breakdown of the loan proceeds, the net amount received, and every single charge (processing fees, service fees, etc.).
- The "Net Proceeds" Rule: It is illegal for a lender to hide the true cost of a loan by deducting massive "service fees" upfront without disclosing them as part of the total interest or finance charge.
4. SEC Registration and Licensing
An OLA’s interest rates are often the least of its legal problems if it is not properly registered. For an OLA to operate legally in the Philippines, it must possess:
- Certificate of Incorporation: Proof it is a registered corporation.
- Certificate of Authority (CA): A specific license from the SEC to operate as a Lending or Financing Company.
Operating without a CA is a criminal offense under the Lending Company Regulation Act of 2007. Many high-interest OLAs operate in the "grey market" without these licenses, making their entire operation—and their interest claims—legally dubious.
5. Illegal Collection Practices
The legality of the interest rate is often tied to how it is collected. SEC Memorandum Circular No. 18 (Series of 2019) prohibits "Unfair Debt Collection Practices." Even if a borrower owes a high-interest debt, lenders cannot:
- Access the borrower's contact list without consent.
- Post "shaming" comments on social media.
- Threaten physical harm or use profane language.
- Contact people on the borrower's contact list who are not co-makers or guarantors.
6. Remedies for Borrowers
If an OLA charges interest rates exceeding the BSP caps or uses unconscionable rates, the following legal principles apply:
- Partial Nullity: The court may void the excessive interest while keeping the principal obligation valid. The borrower still owes the original amount borrowed, but the interest may be reduced to the legal rate (usually 6% per annum for liquidated claims).
- SEC Complaints: Borrowers can file formal complaints with the SEC Corporate Governance and Finance Department (CGFD) for violations of Circular 1133 or the Truth in Lending Act.
- Criminal Charges: If the lender is unlicensed, they may be prosecuted under the Lending Company Regulation Act. If they use harassment, they may face charges for Cyber Libel or violations of the Data Privacy Act of 2012.