In the Philippine jurisdiction, the regulation of interest rates has evolved from a rigid statutory ceiling to a system defined by the "freedom of contract," tempered by judicial equity and specific administrative caps for the protection of small-scale borrowers. This article outlines the current legal framework governing interest rates for lending companies, the criteria for "unconscionability," and the recent regulatory shifts implemented by the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC).
I. The Suspension of the Usury Law
For decades, interest rates in the Philippines were strictly governed by Act No. 2655, commonly known as the Usury Law, which set specific ceilings on interest (e.g., 12% per annum for secured loans). However, in 1982, the Central Bank issued Circular No. 905, which effectively suspended these ceilings.
As it stands in 2026, there is no longer a single, across-the-board statutory interest ceiling for all private loans. Under the principle of autonomy of contracts (Article 1306, Civil Code), parties are generally free to stipulate any interest rate they deem appropriate, provided it is not contrary to law, morals, good customs, public order, or public policy.
II. The Legal Interest Rate: The 6% Rule
When the parties fail to stipulate a specific interest rate in writing, or when a court awards damages for the delay in payment (moratory interest), the legal interest rate applies.
Per BSP Circular No. 799 (Series of 2013), the prevailing legal interest rate in the Philippines is 6% per annum. This rate is applied in the following scenarios:
- Loans or Forbearances: When money is lent without a written agreement on the interest rate.
- Judgments: On the amount awarded by a court, running from the time the judgment becomes final and executory until its full satisfaction.
Note: Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. Without a written clause, a lender cannot legally collect any interest other than the 6% legal rate triggered by a formal demand and subsequent delay.
III. Interest Rate Caps for Lending and Financing Companies
While general loans remain deregulated, the government has moved to curb predatory practices in the "micro-lending" and "online lending" sectors. BSP Circular No. 1133 (2021) and the subsequent SEC Memorandum Circular No. 14 (Series of 2025) establish specific ceilings for unsecured, short-term, small-value loans.
1. Covered Loans
These caps specifically apply to loans granted by lending companies and financing companies that are:
- Unsecured: No collateral required.
- Small-Value: Principal amount not exceeding ₱10,000.
- Short-Term: Repayment period of up to four (4) months.
2. Prescribed Ceilings (Effective April 1, 2026)
Following the most recent recalibration by the SEC and the Monetary Board, the following limits apply to new, renewed, or restructured loans:
| Category | Maximum Legal Limit |
|---|---|
| Nominal Interest Rate | 6% per month (approx. 0.2% per day) |
| Effective Interest Rate (EIR) | 12% per month (approx. 0.4% per day) |
| Late Payment Penalties | 5% per month on the outstanding scheduled amount |
| Total Cost Cap | 100% of the Principal |
The Effective Interest Rate (EIR) is the most critical metric, as it includes the nominal interest plus all other fees (processing, service, and notarial fees). The Total Cost Cap ensures that the total sum of all interest, fees, and penalties can never exceed the original amount borrowed, effectively preventing "debt traps."
IV. The Doctrine of Unconscionable Interest
Even for loans that exceed ₱10,000 or have longer tenors—which fall outside the specific caps mentioned above—lenders do not have absolute freedom. The Philippine Supreme Court has consistently ruled that interest rates which are "excessive, iniquitous, unconscionable, and exorbitant" are void ab initio (void from the beginning).
Judicial Benchmarks
While there is no "hard" numeric limit in the Civil Code, jurisprudence (e.g., Medel v. Court of Appeals, Lara’s Gifts & Decors, Inc. v. PNB) suggests the following:
- 24% per annum: Generally considered acceptable in commercial transactions.
- 36% per annum (3% per month): Often viewed as the "red line." Courts frequently reduce rates of 3% per month or higher to the legal rate of 6% per annum, finding them "contrary to morals."
- Compounding Interest: Interest on interest is only allowed if there is an express written agreement to that effect, or upon judicial demand (Article 2212, Civil Code).
V. Transparency and the Truth in Lending Act
The Truth in Lending Act (Republic Act No. 3765) requires all creditors to provide a Disclosure Statement to the borrower prior to the consummation of the loan transaction. This document must clearly state:
- The cash proceeds of the loan.
- An itemized list of all fees and charges (service fees, processing fees).
- The total finance charge (the total peso cost of the loan).
- The Effective Interest Rate (EIR).
Failure to provide this disclosure does not invalidate the loan, but it subjects the lending company to administrative fines and allows the borrower to recover a portion of the finance charges through legal action.
VI. Enforcement and Penalties
Lending companies found violating these interest caps or failing to provide proper disclosures face severe sanctions from the SEC, including:
- First Offense: Fine of ₱50,000.
- Second Offense: Fine of up to ₱1,000,000 and/or 60-day suspension.
- Third Offense: Revocation of the Certificate of Authority to operate.
Borrowers who believe they are being charged illegal rates can file formal complaints with the SEC Enforcement and Investor Protection Department (EIPD) or the BSP Consumer Protection and Market Conduct Office.