I. Constitutional and Statutory Framework Governing Interest Rates
1. The Usury Law is Effectively Suspended
The old Civil Code provisions on usury (Arts. 1175, 1957, 1961, and especially Act No. 2655 – “Usury Law” of 1916) that used to impose a maximum of 12% per annum (or 14% in certain cases) have been rendered inoperative for most transactions since 1983.
Central Bank Circular No. 905-1982 (issued by the then Central Bank of the Philippines pursuant to its authority under P.D. 1684) lifted the interest-rate ceiling on all loans and credit transactions, except those granted by pawnshops and deposits. Section 1 of the Circular states:
“The rate of interest and other charges on a loan or forbearance of money, goods or credit, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under the Usury Law, as amended.”
This suspension was upheld by the Supreme Court in a long line of cases, most notably:
- Medel v. Court of Appeals (1999) – acknowledged the suspension but still struck down “unconscionable” rates
- Liam Law v. Olympic Mines (2004)
- Sps. Solangon v. Salazar (2005)
- Diaz v. People (2017)
- Daray v. Sps. Allarde (2022)
Result: There is no statutory ceiling on interest rates in ordinary loans, including online loans, as long as the rate is stipulated in writing and mutually agreed upon.
2. The Limited Remaining Usury Rule
The only transactions still subject to a legal interest ceiling are:
- Pawnshop loans – 2.5% per month or fraction thereof (Pawnshop Regulation Act, R.A. 11469 as amended)
- Interest imposed by the Bangko Sentral on its own loans to banks (currently 6% legal interest under BSP rules)
All other loans, including online P2P and consumer loans, are free from any statutory maximum.
II. When “High” Interest Rates Become Illegal or Unenforceable
Even without a ceiling, Philippine courts retain the power to reduce or nullify interest rates that are iniquitous, unconscionable, or contrary to morals under the following provisions:
| Legal Basis | Key Provision | Effect |
|---|---|---|
| Article 1306, Civil Code | Freedom of contract is not absolute | Contracts may be void if contrary to law, morals, good customs, public order, or public policy |
| Article 1409, Civil Code | Iniquitous or unconscionable contracts are inexistent and void ab initio | Entire stipulation or the entire contract may be void |
| Article 1229, Civil Code | Judge may reduce penalty if iniquitous or unconscionable | Applied by analogy to interest |
| Article 2220, Civil Code | Willful breach or bad faith allows reduction of unconscionable interest | Rarely invoked |
Landmark Cases on “Unconscionability”
| Case | Effective Rate | Ruling |
|---|---|---|
| Medel v. CA (1999) | 66% p.a. (5–6% per month) | Reduced to 12% p.a.; first major post-suspension unconscionability case |
| Chua v. Timan (2008) | 72% p.a. | Upheld as not unconscionable |
| Castro v. Tan (2009) | 180% p.a. | Declared unconscionable |
| Imperial v. Jaucian (2004) | 180–240% p.a. | Void for being iniquitous |
| Ruiz v. CA (2003) | 60% p.a. | Upheld |
| BDO v. C&A Construction (2011) | 36% p.a. + penalties | Upheld |
| Sps. Albos v. Sps. Embisan (2016) | 60% p.a. | Upheld |
| Daray v. Sps. Allarde (G.R. No. 213812, 2022) | 120% p.a. (10% per month) | Reduced to 12% p.a. |
Current judicial trend (2020–2025): rates between 3% to 5% per month (36–60% p.a.) are generally upheld if clearly stipulated and the borrower is not in dire necessity. Rates above 6–7% per month (72–84% p.a.) are increasingly being struck down or reduced, especially in consumer and small online loans.
III. Specific Regulation of Online Lending Platforms (OLPs)
Since 2018, the Securities and Exchange Commission (SEC) has assumed primary jurisdiction over financing companies and lending companies, including online lenders.
Key Issuances
SEC Memorandum Circular No. 18, series of 2019 – “Regulatory Framework and Guidelines for Online Lending Platforms”
- Requires registration as either Financing Company or Lending Company
- Prohibits predatory practices
- Mandates transparency in disclosure of effective interest rate (EIR)
SEC Memorandum Circular No. 3, series of 2021 – Amended guidelines
- Requires disclosure of Effective Interest Rate (EIR) using the BSP-prescribed formula
- Caps penalty charges at 5% per month on the overdue amount (not on the entire principal)
- Prohibits compounding of penalties on penalties
- Requires 3-day grace period before penalty
- Mandates clear disclosure of total cost of credit
SEC Memorandum Circular No. 14, series of 2022 – Further prohibitions
- Bans the use of third-party collection agencies that employ shaming, threats, or violence
- Prohibits public shaming (posting on social media, contacting employer/family without consent)
Criminal Liability for Unregistered OLPs
Operating without SEC Certificate of Authority is punishable under Section 44 of R.A. 8799 (Securities Regulation Code) with fines up to ₱5,000,000 and/or imprisonment of 7–21 years.
IV. Other Criminal Laws Frequently Invoked Against Abusive Online Lenders
| Law | Provision | Common Application |
|---|---|---|
| R.A. 10175 (Cybercrime Prevention Act) | Libel, unjust vexation, threats via ICT | Shaming borrowers on social media |
| R.A. 9995 (Anti-Photo and Video Voyeurism Act) | Posting private photos without consent | Threatening to distribute ID photos |
| R.A. 9262 (Anti-VAWC) – if borrower is female | Economic abuse | When lender uses intimidation to collect |
| Article 151, Revised Penal Code | Public shaming / scandal | Contacting employer or relatives |
| Article 287 (Light Coercion) & 289 (Grave Coercion) | Threats to collect debt | Death threats, threats of harm |
The Supreme Court in Disini v. Secretary of Justice (2014) and subsequent DOJ opinions has consistently ruled that pure debt collection, even if harsh, is not automatically cyberlibel unless the statements are clearly false and malicious.
V. Current Practical Thresholds (As of 2024–2025)
| Effective Monthly Rate | Typical Judicial/SEC Treatment |
|---|---|
| ≤ 3% per month (≤ 36% p.a.) | Almost always upheld |
| 3.1% – 5% per month | Usually upheld if clearly disclosed |
| 5.1% – 7% per month | Frequently reduced by courts |
| > 7% per month | High probability of being declared void or reduced to 1% per month (12% p.a.) |
Many legitimate registered OLPs now charge 0.8% to 2.5% per month (plus one-time processing fees that push EIR to around 30–50% p.a.) to stay safely within judicial tolerance.
VI. Remedies Available to Borrowers
- File a complaint with the SEC for violation of disclosure rules or predatory practices → possible cease-and-desist order and fines.
- File a civil case for declaration of nullity of the interest stipulation (and possibly the entire loan if usurious in the old sense).
- File criminal cases (cyberlibel, unjust vexation, grave threats) against collectors.
- Invoke the Data Privacy Act (R.A. 10173) if personal data is mishandled.
VII. Conclusion
In the Philippines today:
- There is no statutory ceiling on interest rates for ordinary loans, including online loans.
- Rates are limited only by the judicial doctrine of unconscionability.
- Rates above roughly 6–7% per month are at serious risk of being reduced or voided by courts.
- Online lending platforms must be SEC-registered and comply with strict disclosure and anti-abuse rules.
- Predatory collection practices (shaming, harassment) are criminally punishable even if the principal and moderate interest are valid.
Thus, while “high” interest rates are not per se illegal, rates that shock the conscience of the court will be struck down, and abusive operators face both civil nullity and criminal prosecution. The combination of judicial unconscionability doctrine and aggressive SEC regulation has effectively created a de facto ceiling significantly lower than what many unregistered “5-6” or predatory apps attempt to charge.