Legality of an 8% Monthly Interest Rate on Loans in the Philippines

Key takeaways (read this first)

No general statutory cap applies to private loans in the Philippines since the Central Bank suspended Usury Law ceilings decades ago. But courts strike down “unconscionable” rates and reduce them to reasonable levels.
8% per month (≈96% per year) is very likely unconscionable and has repeatedly been reduced by the Supreme Court to far lower annual rates in comparable cases.
Special caps do exist for certain small consumer loans by lending/financing companies and online lending platforms (under the SEC). For those covered, 8%/month can be outright illegal.
Interest must be in writing to be enforceable. Compounding, penalties, and fees require explicit written stipulation and can also be cut down if excessive.
If a dispute reaches court, legal interest (for money due) is generally 6% per annum from the proper reckoning date.

The legal framework

1) Usury Law ceilings suspended, not repealed

The Usury Law (Act No. 2655) remains on the books, but Central Bank (now BSP) Circular No. 905 (1982) suspended all interest ceilings. Result: parties may agree on any rate subject to limits of law, equity, and public policy.

2) Civil Code anchors

Article 1956: Interest is not due unless expressly stipulated in writing.
Articles 19, 20, and 21 (abuse of rights & morals) and Article 1229 (penalty reduction) empower courts to strike down or reduce iniquitous/unconscionable stipulations—including interest, penalties, and charges.
Article 2209: Damages for breach of obligations may take the form of interest.
Article 2212: Unpaid interest can itself earn legal interest from the time it is judicially demanded (i.e., “interest on interest” only after demand).

3) Judicial control over excessive rates

The Supreme Court has, in many cases, voided or reduced monthly rates of 3%–6% and higher (i.e., 36%–72%+ per year) as unconscionable—even though no statutory cap exists. Courts then substitute a reasonable rate, historically 12% p.a. (before mid-2013) and later 6% p.a. (post-2013; see below). Illustrative rulings include decisions such as Medel v. Court of Appeals (5.5%/month struck down), Solangon v. Salazar (6%/month reduced), Castro v. Tan (3%/month reduced), among others. The consistent theme: very high monthly rates are against morals and public policy and will not be enforced as written.

4) Legal interest for loans/forbearance and judgments

In Nacar v. Gallery Frames (2013), the Court aligned legal interest with BSP-MB Circular No. 799: 6% per annum (replacing the old default 12% p.a.).
This 6% p.a. rate typically applies:
- to monetary judgments from finality until satisfaction; and
- to loans or forbearance of money when a contract is silent on interest, when excessive rates are reduced, or when interest has transitioned from pre- to post-judgment phases.

5) Regulatory caps for certain small consumer loans (SEC-regulated)

While banks are under the BSP, lending companies, financing companies, and online lending platforms are regulated by the SEC.
Under SEC rules issued in 2021 for small-value, short-term consumer loans (e.g., up to ₱10,000 and up to around 4 months maturity), there are hard caps on the nominal monthly interest and on the effective interest rate (EIR), plus limits on fees/penalties.
Practical effect: For loans within that scope, a rate like 8% per month can breach the nominal monthly cap (commonly 6%/month) and thus be illegal. Even if a lender tries to repackage charges as “fees,” the EIR cap can still be violated.

Bottom line on coverage:

If the loan is a small, short-term consumer loan from an SEC-regulated lender/online platform → statutory caps apply and 8%/month is generally prohibited.

If the loan is outside that scope (e.g., private loan between individuals, larger business loan, or bank credit) → no fixed statutory cap, but 8%/month is still very likely unconscionable and subject to court reduction.

Applying the rules to 8% per month

Nominal math: 8%/month ≈ 96% per annum (simple, without compounding).
Court scrutiny: Rates in the 3%–6%/month band have been struck down as unconscionable; 8%/month is even higher and would very likely be voided or reduced if challenged.
SEC-covered small loans: 8%/month would exceed the 6%/month nominal cap and likely violate the EIR cap, rendering the stipulation illegal.
Practical litigation outcome: If a court finds 8%/month unconscionable/illegal, it will substitute a reasonable rate (commonly 6% per annum today), and it may likewise reduce penalties, late charges, and “processing fees.”

Beyond “interest”: penalties, fees, and compounding

Penalties/late charges: Must be expressly stipulated. Courts routinely pare down penalty rates (e.g., 3%–5%/month and the like) as excessive, especially when combined with high interest.
Fees (processing, service, origination, collection): Must be disclosed. Hidden or disproportionate fees can be struck down or counted toward the EIR, risking statutory cap violations (for SEC-covered loans).
Compounding (interest on interest): Requires a clear written stipulation. Even then, courts may rein it in if it creates oppressive cost. Without stipulation, unpaid interest earns legal interest (6% p.a.) only from judicial demand.

Documentation, disclosure, and enforceability

Written stipulation required for any contractual interest (Civil Code art. 1956).
The Truth in Lending Act (R.A. 3765) and its IRR require clear disclosure of the finance charge and effective interest rate to borrowers. Non-disclosure can support regulatory action and bolster defenses against the lender’s claims.
Lending Company Regulation Act (R.A. 9474) requires lenders to be duly registered and compliant; noncompliance can spawn regulatory and criminal liability and undermine enforceability of loan terms.

Common scenarios

Private loan between individuals
- No fixed cap, but 8%/month is presumptively unconscionable.
- If sued, expect a court to reduce the rate (often to 6% p.a.) and possibly delete or trim penalties.
Small, short-term online/app loan from a lending/financing company
- Capped by SEC rules → 8%/month illegal.
- Excessive fees or “daily rates” that blow past the EIR cap are also non-compliant.
Bank loan or credit card
- No SEC small-loan caps; banks are under BSP.
- Still subject to unconscionability review and consumer protection standards; abusive pricing can be judicially reduced.
Pawnshop
- Governed by BSP regulations with strict disclosure and standardized ticketing; while historical practice allowed high charges, unconscionability and consumer protection can still be invoked if pricing is abusive in context.

Practical guidance (for borrowers and lenders)

For borrowers

Check if the lender is SEC-regulated and if your loan falls within small-loan caps. If yes, 8%/month is not allowed.
Keep all documents: loan contracts, e-mails, app screenshots, text reminders. Lack of clear written terms weakens the lender’s interest claim.
Compute the EIR, not just the “monthly rate.” Fees and short maturities can make the real cost much higher.
If sued on an 8%/month loan, raise unconscionability and statutory cap defenses (if applicable) and cite Nacar for 6% p.a. legal interest.

For lenders

Put all terms in writing and disclose the EIR.
If you are an SEC-supervised lending/financing company or online platform, implement system caps (nominal and EIR) and fee limits; don’t “relabel” interest as fees.
Even outside SEC caps, avoid rates that courts have flagged as unconscionable (anything approaching or exceeding a few percent per month).
Separate interest from penalties and keep both modest; courts scrutinize stacked charges.

Worked example

Loan: ₱50,000; Term: 6 months; Rate: 8%/month simple; Fees: none

Contractual interest (simple): ₱50,000 × 0.08 × 6 = ₱24,000 Total due (principal + interest): ₱74,000 in six months (before penalties/late charges).
If challenged: A court could (and often does) reduce that rate to a reasonable annual rate (e.g., 6% p.a.) and recompute the amount due accordingly—often cutting the interest dramatically.

Checklist before agreeing to—or challenging—8% per month

❑ Is the interest written in the contract?
❑ Does the lender fall under SEC small-loan caps (loan size/maturity, entity type)?
❑ Are there penalties/fees that push the EIR above allowable limits or into unconscionable territory?
❑ Is there a compounding clause? If not, interest is simple and unpaid interest earns 6% p.a. only after judicial demand.
❑ If in dispute, apply Nacar (6% p.a. legal interest) and invoke unconscionability to seek rate reduction.

Bottom line

General regime: No across-the-board usury cap, but courts won’t enforce oppressive pricing.
8% per month is almost always indefensible in litigation and often illegal for small SEC-covered consumer loans.
Sound practice—both legally and commercially—is to keep rates and all add-ons within transparent, reasonable, and well-documented limits.