Obligation to Pay Loans from Unregistered Lenders in the Philippines

I. Nature of the Issue

In the Philippines, thousands of borrowers—especially those availing of online or mobile app-based loans—regularly confront this question: “Do I still have to pay the loan if the lender is not registered with the SEC or supervised by the BSP?”

The short, practical, and prevailing answer under Philippine law and regulatory policy is: No, there is no enforceable legal obligation to pay either principal or interest.

The loan agreement is null and void ab initio for illegality of cause and object, and public policy bars the illegal lender from using Philippine courts to enforce it.

II. Regulatory Framework

1. Banks, quasi-banks, trust entities, and non-bank financial institutions performing quasi-banking functions – regulated and supervised by the Bangko Sentral ng Pilipinas (BSP) under Republic Act No. 7653 (New Central Bank Act) and Republic Act No. 8791 (General Banking Law).

2. Financing companies and lending companies – regulated by the Securities and Exchange Commission (SEC) under:

   • Republic Act No. 8556 (Financing Company Act of 1998, as amended)
   • Republic Act No. 9474 (Lending Company Regulation Act of 2007) and its IRR

3. Online lending platforms – expressly covered by SEC Memorandum Circular No. 18, s. 2019 (Regulation of Online Lending Platforms) and SEC Memorandum Circular No. 19, s. 2019 (Prohibited Acts in Online Lending). All operators, whether corporation or single proprietorship, must register as a corporation and secure a Certificate of Authority (CA) to operate as a financing or lending company.

Any person or entity that habitually extends credit or lends funds sourced from the public (even if only 19 or fewer lenders under the old rule, now effectively any public solicitation) without the required Certificate of Authority is operating illegally.

III. Legal Consequences of Operating Without Registration

1. Administrative – Permanent cease and desist orders, fines up to P1,000,000 per violation, revocation of primary registration (if any), blacklist.

2. Criminal – Violation of Sec. 12, RA 9474 is punishable by imprisonment of 6 months to 10 years or fine of P50,000 to P1,000,000 or both. Directors/officers are solidarily liable. Separate criminal cases for violation of the Corporation Code, Cybercrime Prevention Act (RA 10175), Data Privacy Act (RA 10173), and light threats/unjust vexation under the Revised Penal Code are routinely filed.

IV. Validity of the Loan Contract with an Unregistered Lender

The contract is null and void from the beginning for the following reasons:

1. Illegality of cause and object (Art. 1409(1), Civil Code).
   The lender is prohibited by law from engaging in the business of lending. The “cause” of the lender’s obligation to deliver the money is the illegal lending business. Since the law expressly forbids the act, the cause is illicit.

2. Violation of mandatory statutory prohibition (Art. 5, Civil Code – “Acts executed against provisions of mandatory or prohibitory laws shall be void…”).

3. Public policy – The registration requirement exists precisely to protect the borrowing public from predatory rates, unfair collection practices, and harassment. Allowing an illegal lender to enforce the contract would defeat the very purpose of the law.

4. In pari delicto rule operates in favor of the borrower (Art. 1412, Civil Code).
   When both parties are guilty of violating the law, the courts will leave them where they are. The illegal lender, being the more guilty party (it knowingly operated without authority), is in a worse position and cannot seek judicial assistance.

5. Official SEC Position (consistently stated since 2019 up to 2025)
   “Loan transactions entered into by unregistered lending platforms are void. Borrowers are, therefore, not legally obligated to pay such entities.”
   This position has been repeated in countless press releases, advisories, and statements of SEC Chairperson Emilio B. Aquino and the Enforcement and Investor Protection Department.

6. Court Practice (Metropolitan Trial Courts, Regional Trial Courts, and Court of Appeals decisions 2020–2025)
   Collection cases filed by unregistered online lenders are routinely dismissed for:

   • Lack of legal personality/capacity to sue
   • Illegality of the contract
   • Violation of public policy
   • Plaintiff’s “unclean hands”

   In several cases, judges have even awarded moral/exemplary damages and attorney’s fees to the borrower on counterclaim.

V. Common Counter-Arguments and Why They Fail

1. “The borrower was unjustly enriched; he must return the principal at least.”
   Rejected. The Supreme Court has repeatedly held that when the very root of the contract is illegal, no action for unjust enrichment lies in favor of the party who violated the law (Gonzales v. Trinidad, 67 Phil. 682; Lita Enterprises v. IAC, G.R. No. L-64693, etc.). The borrower is protected by the in pari delicto doctrine and public policy.

2. “Private individuals don’t need to register.”
   Correct, but only if the lending is occasional and not in the course of trade or business. Once the lender advertises, uses an app, charges effective rates of 100–900% per annum, and lends to the public on a regular basis, it is already engaged in the lending business and must register. The “5-6” informal lenders who lend their own money on the street are generally not covered by RA 9474 (SEC Opinion No. 20-06, 2020), but app-based lenders almost always are.

3. “The contract is merely voidable.”
   No. Violations of mandatory licensing requirements for businesses that affect public interest render the contract void, not voidable.

VI. Practical Implications for Borrowers

• You are not legally required to pay anything to an unregistered lender.
• You may safely ignore demands, threats, or harassment.
• Report the lender immediately to the SEC Enforcement and Investor Protection Department (epd@sec.gov.ph) or through the SEC eSPARC platform.
• If the lender posts your photo or contacts your relatives/friends/employer, file criminal complaints for unjust vexation, grave coercion, violation of RA 10175 (cyber-libel or unlawful access), and RA 10173 (Data Privacy Act) with damages.
• If sued, raise the illegality as an affirmative defense and file a counterclaim. The case will almost certainly be dismissed.

VII. Conclusion

Under Philippine law as of December 2025, loans extended by unregistered lending or financing companies (including virtually all predatory online lending apps that are not in the SEC’s official list of registered platforms) create no enforceable obligation on the part of the borrower.

The contract is void ab initio, the lender has unclean hands and no personality to sue, and public policy emphatically sides with the borrower.

The only obligation that remains—if one wishes to call it that—is moral: a person of conscience may choose to return the principal received. But the law imposes no such duty, and the courts will not enforce it.

Borrow only from SEC-registered lending/financing companies or BSP-supervised institutions. The list is publicly available on the SEC website.

That is the complete legal position on the matter.