In the Philippines, the regulation of interest rates and late payment penalties is a blend of historical legislation and modern judicial discretion. While the country has largely moved away from rigid caps on interest rates, the legal system provides safeguards against "conscionable" or "iniquitous" charges.
1. The Status of the Usury Law
Historically, the Usury Law (Act No. 2655) set strict ceilings on interest rates for loans. However, in 1982, the Central Bank of the Philippines issued CB Circular No. 905, which effectively suspended these ceilings.
- Current Rule: There is no longer a legally mandated maximum interest rate for most loans. Parties are generally free to agree on whatever rate they deem appropriate.
- The Power of the Court: Even though the Usury Law is suspended, the Philippine Supreme Court has consistently ruled that it has the power to reduce interest rates that are deemed unconscionable, iniquitous, or contrary to morals.
2. Conventional Interest vs. Compensatory Interest
To understand penalties, one must distinguish between the two types of interest:
- Monetary/Conventional Interest: The cost of borrowing money, agreed upon by the parties in writing.
- Compensatory/Penalty Interest: The "damages" or penalty imposed when a debtor fails to pay on time.
3. Jurisprudential Limits on "Unconscionable" Rates
While there is no "hard cap" in a statute, the Supreme Court frequently intervenes when rates become predatory.
| Interest Rate | General Judicial View |
|---|---|
| 12% per annum | Generally considered reasonable and the "default" for many years. |
| 24% per annum | Often upheld in commercial transactions where parties have equal bargaining power. |
| 36% per annum or higher | Frequently struck down as "excessive" and reduced by courts to 12% or 6%. |
In cases such as Medel v. Court of Appeals, the Court ruled that an interest rate of 5.5% per month (66% per annum) was void for being "excessive and unconscionable," even if the debtor voluntarily signed the contract.
4. Default Interest Rates (BSP Circular No. 799)
When a contract is silent regarding the interest rate in the event of default, or when a court awards damages, the law applies a "legal interest rate."
Effective July 1, 2013, per BSP Circular No. 799, the legal interest rate in the Philippines is 6% per annum. This rate applies to:
- Loans or forbearance of any money, goods, or credits.
- Judgments (from the time they become final and executory until fully paid).
Note: Prior to this circular, the legal interest for loans was 12%, while for non-loan obligations (like breach of contract), it was 6%. The 2013 circular unified these to a flat 6%.
5. Late Payment Penalties and Surcharges
Late payment penalties (often called "penalty clauses" or "liquidated damages") are governed by the Civil Code of the Philippines.
- Article 1226: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, unless there is a contrary stipulation.
- Article 1229: The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or if the penalty is iniquitous or unconscionable.
In credit card transactions and small consumer loans, "late fees" are common. While these are allowed, the Supreme Court has often stepped in to reduce combined interest and penalty charges that exceed 3% to 4% per month.
6. Requirements for Validity
For an interest rate or penalty to be legally enforceable in the Philippines:
- It must be in writing: Under Article 1956 of the Civil Code, "No interest shall be due unless it has been expressly stipulated in writing."
- Truth in Lending Act Compliance: Under Republic Act No. 3765, lenders must disclose the full cost of the loan (including interest, service charges, and penalties) to the borrower prior to the consummation of the transaction. Failure to do so does not void the loan but subjects the lender to fines.
7. Summary of Key Legal Principles
- No Absolute Ceiling: The Usury Law is suspended, but "unconscionable" rates are void.
- The 6% Rule: The default legal interest rate for loans and judgments is 6% per annum.
- Judicial Discretion: Courts have the inherent power to reduce interest rates or penalties if they find them to be "shocks to the conscience."
- Compounding Interest: Interest on interest is only allowed if there is an express written agreement or if the interest due is judicially demanded (Article 2212, Civil Code).