The Legality of High Interest Rates on Loans in the Philippines: A Complete Guide

Short answer: There’s no fixed nationwide “maximum” interest rate after the Usury Law ceilings were suspended in 1983. But high rates can still be struck down if a court finds them unconscionable or contrary to public policy, and some specific products (like credit cards) are capped by regulators. This guide explains when a high rate is lawful, when it isn’t, and how courts and regulators treat interest, penalties, compounding, and fees.

Key takeaways

No absolute cap: The Usury Law (Act No. 2655) limits were suspended by Central Bank Circular No. 905 (1982), so parties generally may agree on rates.
But not a free-for-all: Courts routinely reduce or nullify interest rates and penalty charges deemed iniquitous or unconscionable, even if freely signed.
Written requirement: No interest is due unless it is expressly stipulated in writing (Civil Code Art. 1956).
Legal interest (default rule): If there’s no valid contractual rate, courts award legal interest, which jurisprudence has set at 6% p.a. in modern cases (post-2013 framework).
Compounding limits: Interest-on-interest requires clear written agreement; otherwise only legal interest on due interest may run from judicial demand (Civil Code Arts. 1956, 2212).
Product-specific caps exist: The BSP (Bangko Sentral ng Pilipinas) may cap rates/fees for certain products (notably credit cards) and prescribe disclosure rules for banks; the SEC regulates lending/financing companies and outlaws abusive collection.
Documentation is everything: Courts enforce what’s written, scrutinize effective interest (including fees/penalties), and will strike down terms that shock the conscience.

1) Sources of law & regulatory architecture

Civil Code of the Philippines
- Art. 1306: Freedom to contract within the limits of law, morals, good customs, public order, or public policy.
- Art. 1956: No interest unless expressly stipulated in writing.
- Art. 2209: If the obligation is to pay money, damages for delay = interest agreed; otherwise, legal interest.
- Art. 2212: Interest due earns legal interest from judicial demand (interest-on-interest via the court).
- Arts. 1229 & 2227: Courts may reduce penalties/liquidated damages if iniquitous or unconscionable.
Usury Law (Act No. 2655) & Central Bank Circular No. 905 (1982)
- Circular suspended ceilings on interest, effectively leaving rates to market/contract, subject to court review for unconscionability and special regulations.
Bangko Sentral ng Pilipinas (BSP) authority
- Under the New Central Bank Act (R.A. 7653, as amended by R.A. 11211), the Monetary Board can set caps and rules for specific credit products (e.g., credit cards), and mandates disclosure (e.g., Truth in Lending–style rules for banks).
Securities and Exchange Commission (SEC)
- R.A. 9474 (Lending Company Regulation Act) & R.A. 8556 (Financing Company Act) regulate non-bank lenders/financiers. The SEC issues rules on disclosures, advertising, and debt collection (e.g., bans on shaming/harassment), and can suspend/revoke licenses.
Truth in Lending Act (R.A. 3765)
- Requires clear disclosure of the finance charge and effective interest rate (EIR). Non-disclosure or deceptive practices can invalidate charges and trigger penalties.
Other relevant laws
- Data Privacy Act (R.A. 10173): Limits the use of borrower contacts/personal data—often implicated in abusive collection by online apps.
- Revised Penal Code/Cybercrime Act: Coercion, threats, and online shaming in collections can have criminal consequences.

2) Types of interest & how the law treats them

Conventional (stipulated) interest The rate you put in writing. Enforceable unless a court finds it unconscionable or otherwise unlawful (e.g., violates regulator caps).
Penalty interest / charges Add-ons for default (e.g., “penalty interest,” “late charges”). Even if written, courts may reduce them under Arts. 1229/2227 if they’re excessive or duplicative.
Legal interest (statutory/judicial) Applies when no valid contractual rate exists or as court-awarded interest on monetary judgments. Current doctrine (post-2013) pegs this at 6% per annum in most scenarios, subject to the Nacar framework (see below).
Compounding (interest on interest) Requires clear written agreement and remains subject to unconscionability review. Even without agreement, Art. 2212 allows legal interest on due interest from judicial demand.

3) “How high is too high?” — The unconscionability safety valve

Even with Circular 905, the Supreme Court has consistently invalidated or reduced exorbitant rates. Core themes from jurisprudence:

No bright-line number, but the Court asks:
- Is the rate so high it shocks the conscience?
- Is there gross disparity in bargaining power?
- Do fees + penalties + compounding push the effective rate to oppressive levels?
- Is the penalty duplicative of interest (i.e., punishing the same delay twice)?
Illustrative trend from cases While outcomes turn on facts, courts have flagged monthly rates in the 3%–7% (36%–84% p.a.) range and above as often unconscionable, frequently reducing them to the prevailing legal interest (historically 12% p.a.; now 6% p.a.) or to a more reasonable conventional rate. A landmark example is Medel v. Court of Appeals (1998), where a 5.5% per month (66% p.a.) rate was struck down as unconscionable and reduced.
Penalty charges are scrutinized separately. Courts may:
- Strike or cut penalty interest/charges when piling on with high conventional interest.
- Allow either reasonable conventional interest or a modest penalty—but not both at oppressive levels.

Bottom line: Courts do not allow contracts to become instruments of oppression. Even a signed, notarized note can be reformed when the pricing is predatory.

4) The “legal interest” & judgment-interest rules (how courts compute)

Supreme Court guidance—Eastern Shipping Lines (1994) refined by Nacar v. Gallery Frames (2013)—sets the framework:

Before July 1, 2013: “Legal interest” on loans/forbearance of money was 12% p.a.
From July 1, 2013 onward: 6% p.a. legal interest applies (per BSP Monetary Board Circular changing the benchmark), both pre- and post-judgment, with specific timing rules:
- If a loan/forbearance: apply the stipulated rate until default (if valid), then 6% p.a. as judicial rate from the date of judicial demand (or other dates per Nacar), and 6% p.a. from finality of judgment until paid.
- If there’s no valid stipulated rate (or it’s void/unconscionable): use 6% p.a. from appropriate accrual dates.

Practical effect: Even where a contract’s high rate is trimmed or voided, 6% p.a. will generally run once the case is in court and from finality until satisfaction.

5) Sector-specific rules (where true caps or extra duties exist)

Credit cards (BSP-regulated) The BSP sets caps on monthly finance charges (and some fees) on credit cards via Monetary Board circulars. The exact cap is periodically reviewed. Lenders must also disclose EIR and comply with collection standards.
Banks & quasi-banks (BSP) No general caps on all loan types, but robust disclosure and consumer protection standards apply; BSP can issue product-specific limits and conduct rules.
Lending & financing companies (SEC) No universal cap, but strict disclosure and fair collection rules apply. Harassment/shaming of borrowers is prohibited; violations risk license action, administrative fines, and potential criminal or privacy exposure.
Pawnshops (BSP) Pawnshops are BSP-supervised. Historically, regulation focuses on disclosure and consumer protection rather than a fixed nationwide cap on interest. Some charges/operations have product-specific rules. Always check the pawn ticket and mandated disclosures.
Microfinance NGOs, co-ops, special programs Typically no fixed caps, but they operate under special charters and regulatory standards (e.g., disclosure/EIR, governance, and consumer protection).

Because caps for some products (especially credit cards) are regulatory and may change, parties should consult the current BSP/SEC circulars applicable to their product.

6) Compounding, fees, and “effective” interest

Courts and regulators look past the headline rate to the effective price of credit:

Compounding must be clearly stated; unclear compounding is often disallowed.
Fees (processing, notarial, insurance, convenience, app fees, collection fees) count toward the finance charge and affect EIR under Truth in Lending.
Penalty interest + late fees + collection fees stacked on a high base rate is a red flag for unconscionability.
Hidden charges or misleading disclosures can invalidate fees and expose lenders to sanctions.

7) Enforceability checklist (for lenders)

Put interest and all fees/penalties in writing, clearly and conspicuously (Civil Code Art. 1956, TILA).
Show the EIR and total cost of credit; provide borrower copies.
Avoid compounding unless expressly agreed; explain the basis/frequency.
Keep penalty rates and late fees proportionate; avoid duplication (don’t punish the same delay three ways).
Honor regulatory caps (e.g., credit cards) and collection rules (BSP/SEC).
Maintain records (ledgers, SOAs, notices of default) to prove computations.

8) Borrower defenses & remedies

Unconscionability: Ask the court to reduce or void a confiscatory rate/penalty.
Lack of written stipulation: If interest isn’t written, none is due (only legal interest may apply as damages upon default).
Non-disclosure / deceptive charges: Invoke Truth in Lending to invalidate undisclosed fees and seek damages.
Abusive collection: File complaints with BSP (for banks/pawnshops), SEC (for lending/financing companies), and/or civil/criminal actions for coercion, threats, defamation, privacy breaches.
Reformation/annulment: If forms were misrepresented or terms illegally inserted, seek appropriate relief.

Tip: Courts often require the borrower to tender or admit the uncontested principal and a reasonable interest (e.g., the legal rate) while contesting the excess.

9) Frequently asked questions

Q1: Is there a legal maximum interest rate for loans in the Philippines? A: Not generally. Usury ceilings are suspended, so parties may agree on rates. But courts can strike down rates that are unconscionable, and some products (like credit cards) have regulatory caps.

Q2: Can a lender charge 5% per month? A: You can write it, but it’s at high risk of being reduced or voided by a court as unconscionable, especially if penalties and fees are also high.

Q3: If the interest clause is void, do I pay no interest at all? A: The contractual interest may be void/reduced, but courts typically award legal interest (6% p.a.) as damages from the proper accrual point.

Q4: Are penalty interest and late fees both allowed? A: They can be, but courts may trim if together they become oppressive or duplicative.

Q5: Can interest be compounded? A: Only with a clear written agreement, and even then, a court may limit it if it results in iniquitous pricing. Otherwise, legal interest on due interest runs only from judicial demand.

Q6: What if a lending app threatens to message my entire contact list? A: That can violate Data Privacy and SEC rules on abusive collection, and may constitute criminal offenses. Borrowers can complain to SEC/NPC (privacy) and seek civil/criminal remedies.

10) Practical drafting & negotiation tips

Use simple language for interest, compounding, penalties, and fees; show sample computations and EIR.
Cap penalties (e.g., penalty interest not exceeding X% p.a., late fee not exceeding a flat amount).
Avoid double-counting delay (don’t impose high penalty interest and high late fees and collection charges on the same event).
State a fallback: “If any rate is held excessive, it shall be reduced to the maximum permitted by law without affecting the rest of the contract.”
Disclose everything (TILA spirit) and keep delivery proofs.

11) Selected jurisprudence & doctrines (plain-English)

Medel v. CA (1998): Court struck down 5.5% per month as unconscionable; reduced the rate.
Eastern Shipping Lines (1994) → Nacar v. Gallery Frames (2013): Clarified when and how to apply legal interest, fixing the modern 6% p.a. standard for court awards and loans/forbearance post-2013.
Multiple cases (1990s–present): Courts routinely reduce rates at or above 3% per month, particularly where penalties and fees stack, or where the borrower’s bargaining power is weak.

(This list is illustrative; outcomes vary with facts and timing.)

12) Quick compliance/strategy checklists

For lenders

Interest/fees/penalties clearly written
EIR disclosed; sample amortization shown
No hidden charges; fees are reasonable
No oppressive collection tactics
Product-specific caps (e.g., credit cards) monitored
Records ready to prove computations

For borrowers

Keep copies of loan docs and receipts
Verify EIR and watch for compounding
Challenge excessive penalties/stacked fees
If sued, admit principal and contest excess; request rate reduction to legal or reasonable levels
Report abusive collection to the proper regulator

Final word

In the Philippines, the legality of high interest rates turns on what’s written, how transparent the pricing is, what product is involved, and—critically—whether a judge will view the overall cost as fair or oppressive. There’s wide latitude to agree on rates, but courts and regulators remain the backstop against predatory pricing.

This is a general guide, not legal advice. If you’re dealing with a specific loan or dispute, bring the actual documents (promissory notes, SOAs, receipts, messages) to a Philippine lawyer for tailored advice.