The Legality of High Interest Rates in Online Loans (Philippines)

Last updated for Philippine law and jurisprudence through 2024.

Executive summary

There is no general statutory “interest cap” in the Philippines since 1982, when the Monetary Board suspended the ceilings under the Usury Law. Charging a high rate is not automatically illegal.
But: (1) interest must be in writing; (2) courts may strike down or reduce interest and penalties that are iniquitous or unconscionable; (3) sector-specific caps and rules can apply (e.g., certain small-value loans, credit cards) through regulators; (4) unfair collection, non-disclosure, and privacy abuses are illegal regardless of the rate.
For online lenders, registration, disclosure, and conduct rules are strict; operating without proper authority or using abusive tactics can trigger civil, administrative, and criminal liability.

Core legal framework

1) Usury Law ceilings suspended—not repealed

Act No. 2655 (Usury Law) historically imposed interest ceilings.
Central Bank (now BSP) Monetary Board Circular No. 905 (1982) suspended those ceilings. Result: no across-the-board cap on voluntary interest stipulations.
The Usury Law still exists, but as to rates, it is inoperative while the suspension stands.

2) Civil Code guardrails still bite

Art. 1956: No interest shall be due unless it has been expressly stipulated in writing.
Art. 1229 & 2227 (by analogy on penalties/liquidated damages): courts may reduce penalties that are iniquitous or unconscionable.
Doctrine: Even with no usury ceiling, the Supreme Court has repeatedly voided or reduced harsh interest (often monthly rates of 3%–7% or more) as unconscionable. Illustrative cases include:
- Medel v. Court of Appeals, G.R. No. 131622 (27 Nov 1998) – 5.5% per month struck down as iniquitous; court reduced the rate and limited penalties.
- Neri v. Heirs of Hadji Yusop Uy, G.R. No. 138544 (15 Jan 2002) – 7% per month void for being unconscionable.
- A long line of cases since then follows the same approach: freedom to stipulate does not protect oppressive terms.

3) Legal interest when none is validly stipulated

If no written interest or the court annuls the rate, the obligation earns legal interest as forbearance of money, fixed by jurisprudence at 6% per annum (see Nacar v. Gallery Frames, G.R. No. 189871, 13 Aug 2013).
Judgment interest on money awards is likewise 6% p.a. from finality until full payment (unless subsequent rules change).

4) Regulatory caps & sector-specific rules

Bangko Sentral ng Pilipinas (BSP) regulates banks and certain non-bank financial institutions. It has set periodically adjusted caps for specific products (notably credit cards) and requires truthful disclosure of finance charges.
The Securities and Exchange Commission (SEC) regulates lending companies (RA 9474) and financing companies (RA 8556), including online lending platforms. The SEC has issued circulars that (a) license/registration online lending operators and platforms; (b) cap or structure charges for some small-value, short-term loans; and (c) prohibit unfair debt-collection practices (see below).
Financial Products and Services Consumer Protection Act (RA 11765, 2022) empowers the BSP, SEC and Insurance Commission to set standards, investigate, penalize, and order restitution for abusive pricing, mis-selling, and unfair conduct.

Takeaway: Whether a high rate is lawful can depend on the product type (e.g., credit cards vs. small-value payday loans), the lender’s charter (bank vs. SEC-licensed lender), and the latest circulars applicable to that product. Even absent a cap, courts can still cut down “shock” rates as unconscionable.

Online lending: licensing, disclosures, and conduct

1) Who may lawfully lend online?

Banks and quasi-banks (BSP-supervised) and SEC-licensed lending/financing companies may offer online credit if:
- The entity is duly registered with the SEC (for lending/financing companies), and
- Each online lending platform/app is reported/cleared with the SEC under its registration regime.
Red flags: “Lending” by unregistered entities, or by individuals via apps or social media without a license, is unlawful. Borrowers retain the obligation on the principal received, but the operator faces administrative/criminal exposure.

2) Truth in Lending & cost disclosure

Truth in Lending Act (RA 3765) requires clear disclosure of the total finance charge and effective cost to the borrower before consummation.
BSP/SEC rules build on this with standardized cost metrics (e.g., effective interest rate, total cost of credit) and advertising standards. Hidden fees, “bait” rates, and unclear add-ons are sanctionable.

3) Unfair debt collection & privacy abuses

SEC circulars prohibit threats, harassment, obscenity, public shaming, contacting people in the borrower’s phonebook, misrepresentations (e.g., posing as law enforcement), repeated calls designed to annoy, etc.
Data Privacy Act of 2012 and National Privacy Commission enforcement actions have penalized apps that scrape contacts or disclose borrower data without proper consent/legal basis.
Cybercrime Prevention Act may apply to online harassment, doxxing, or libel.
Violations can lead to fines, suspension/revocation of license, app takedowns, and criminal liability for responsible officers.

How courts analyze “high” interest in practice

Written stipulation? If not, no conventional interest is due (Art. 1956), only legal interest may apply.
Product-specific cap or rule? If yes, exceeding the cap is unlawful and may trigger regulatory penalties; courts can void or reform the clause.
Unconscionability test (even without a cap): Courts look at:
- Magnitude of the rate (especially monthly compounding rates that explode).
- Context: superior bargaining power, take-it-or-leave-it terms, distressed borrower, micro-tenor loans.
- Cumulative cost including penalties, late fees, processing fees, “service charges,” and rollover practices.
- Good faith and commercial reasonableness.
- Result: The court may reduce the rate to a reasonable figure, void the penalty, or treat all charges above principal as void, then impose 6% p.a. as legal interest.

Rule of thumb from jurisprudence: Stipulated rates around 3%–7% per month (36%–84% p.a. and higher) have often been labeled unconscionable and cut down by the Supreme Court, especially when paired with hefty penalties.

Penalties, fees, and “total cost of credit”

Even where the nominal interest looks moderate, stacked fees can render the effective rate oppressive:

Processing/service fees deducted upfront (reduces cash received, inflates effective rate).
Daily penalties for late payment that quickly dwarf principal.
Rollover/refinance fees that restart the clock.

Courts and regulators increasingly focus on the effective cost—what the borrower actually pays, including all charges. Clauses that double-count (e.g., penalty and default interest and liquidated damages) are frequently trimmed.

What counts as illegal or voidable?

Scenario	Likely Legal Status
High rate with clear written agreement, no specific cap applies, lender licensed, fair collection	Not per se illegal, but still vulnerable to court reduction if unconscionable
Rate exceeding a regulator-imposed cap for that product	Illegal/voidable; regulatory sanctions; court may reform
No written interest stipulation	No conventional interest (Art. 1956); only legal interest may be imposed
Unlicensed online lending or platform	Illegal (administrative/criminal exposure); contracts may be tainted
Harassing/shaming collection, scraping contacts	Illegal (SEC/NPC/Cybercrime penalties), regardless of agreed rate
Non-disclosure/misrepresentation of charges	Actionable under TILA, RA 11765, and regulator rules

Borrower playbook (practical)

Check the lender: Is it a bank/BSP-supervised entity or an SEC-licensed lending/financing company? Does the app appear on official lists? (If not, strong warning sign.)
Get the cost in writing: Ask for the effective interest rate and all fees (including penalties) before agreeing. Save screenshots/terms.
Beware daily/weekly penalties and rollovers. Short-tenor loans with “small” daily charges can balloon.
If harassed: Keep records (calls, texts, screenshots). Consider complaints to the SEC (for lending companies), BSP (if a bank), and NPC (privacy), citing unfair collection or unlawful processing of contacts.
If sued—or suing: Raise unconscionability, lack of written stipulation, non-disclosure, or regulatory cap violations. Ask the court to reduce or void rates/penalties and apply 6% p.a. legal interest where appropriate.
Debt restructuring: Propose a settlement pegged to principal + reasonable interest (e.g., close to legal interest) with waiver of excessive fees—often acceptable to avoid litigation and regulatory scrutiny.

Lender compliance checklist (online)

Licensing: Maintain SEC registration (lending/financing company) and comply with online platform registration/notifications; keep AML/CFT controls.
Disclosures: Provide clear, standardized cost of credit, APR/EIR, fees, penalties, and repayment schedules before consummation.
Caps/Rules: Track current circulars for your product (credit cards, payday/small-value loans, etc.). Build system controls that block pricing above limits.
Collections: Adopt written fair-collection policies, staff training, call-time limits, no threats/shaming/misrepresentation, no scraping or blasting borrower contacts.
Privacy: Collect only necessary data, with valid consent; no contact-list harvesting; secure data; respond to data subject requests.
Governance: Appoint compliance and data protection officers; keep logs; handle complaints within regulatory timelines.
Advertising: Avoid “no interest” claims when fees apply; do not hide balloon payments; substantiate “low rate” claims with effective cost.

FAQs

Is any interest rate “too high” to be enforceable? Not automatically. But very high monthly rates—especially with heavy penalties—are routinely cut down by courts as unconscionable, even absent a statutory cap.

Can an app message my contacts if I’m late? Generally no. That’s viewed as unfair collection and often a privacy violation, exposing the lender to penalties regardless of the loan’s rate.

If the lender is unlicensed, do I still have to pay? Borrowers typically remain liable at least for the principal (to prevent unjust enrichment), but the lender may face sanctions and its charges can be invalidated or reduced.

What interest applies if the agreement’s rate is voided? Courts usually impose 6% per annum legal interest from the appropriate reckoning date per Nacar and related rulings.

Key authorities to know (non-exhaustive)

Act No. 2655 (Usury Law) – ceilings suspended by CB Circular No. 905 (1982)
Civil Code – Arts. 1956, 1229, 2227 (interest in writing; reduction of iniquitous penalties)
Nacar v. Gallery Frames, G.R. No. 189871 (13 Aug 2013) – 6% legal interest
Medel v. CA, G.R. No. 131622 (27 Nov 1998) – 5.5%/mo unconscionable
Neri v. Heirs of Uy, G.R. No. 138544 (15 Jan 2002) – 7%/mo unconscionable
RA 3765 (Truth in Lending Act) – disclosure of finance charges
RA 9474 (Lending Company Regulation Act) & RA 8556 (Financing Company Act) – SEC oversight
RA 11765 (Financial Consumer Protection Act of 2022) – enhanced consumer protection powers
Data Privacy Act of 2012 & Cybercrime Prevention Act of 2012 – privacy and anti-harassment online

Bottom line

In Philippine law, high interest on online loans is not automatically illegal—but it becomes legally vulnerable when it breaches specific caps, lacks proper disclosure, comes from unlicensed providers, or is so harsh (especially with stacked penalties and abusive collection) that courts deem it unconscionable. For both borrowers and lenders, the safest path is clear written terms, transparent total cost, respectful collection, and strict adherence to BSP/SEC/NPC rules.