Unconscionable Interest, Fees, and Collection Violations

1) Why this matters

Online lending apps can make credit fast and accessible, but the same speed (and the borrower’s urgency) can be exploited through:

Interest rates that are effectively extreme when converted to monthly/annual terms
Front-loaded “fees” that shrink what the borrower actually receives
Penalty stacks (late interest + late fees + collection fees) that balloon balances
Aggressive or humiliating collection tactics, often involving the borrower’s contacts and social media

Philippine law does not require a single “cap” on interest for all lenders in all situations, but it does police abusive pricing and collection behavior through a mix of civil law doctrines, consumer protection rules, SEC regulations, privacy law, and criminal statutes.

2) The Philippine regulatory landscape for online loans

A. Who regulates whom?

Online lending in the Philippines generally falls into these buckets:

Banks / digital banks / bank-affiliated lenders
- Supervised primarily by the Bangko Sentral ng Pilipinas (BSP)
Lending companies and financing companies (many online lending apps fall here)
- Registered and regulated by the Securities and Exchange Commission (SEC)
- Governed by the Lending Company Regulation Act of 2007 (RA 9474) and the Financing Company Act (RA 8556), plus SEC rules
Cooperatives
- Supervised by the Cooperative Development Authority (CDA)
Unregistered / fly-by-night operators
- Often the worst offenders; may be subject to SEC enforcement, plus civil/criminal liability

Practical consequence: For many “online lending apps” that are not banks, SEC rules on lending/financing companies and general civil law + privacy + criminal laws are central.

3) What “overcharge” looks like legally (beyond the marketing)

A. The “net proceeds” trap (you receive less than the “loan amount”)

A common pattern:

App advertises: “Borrow ₱10,000”
Borrower receives: ₱7,000–₱9,000 after “service fee,” “processing fee,” “membership fee,” etc.
Repayment is computed as if the borrower received the full ₱10,000, making the effective interest rate far higher.

Legal significance: Even if the contract calls the deductions “fees,” courts and regulators can treat them as part of the true cost of credit, especially if they function like disguised interest or are not properly disclosed.

B. Add-on interest and short tenors

Very short repayment periods (e.g., 7–30 days) combined with flat charges can create astronomical effective annual rates when translated into APR.

C. Penalty stacking

Overcharges intensify when late:

“Interest on unpaid balance” + “late payment fee” + “collection fee” + “penalty interest”
Sometimes computed daily, sometimes compounded, sometimes applied on top of already-penalized balances

Legal significance: Philippine courts can reduce penalties and excessive charges even if agreed upon.

4) Core civil law rules that police abusive interest and penalties

A. Interest must be expressly agreed in writing

Under the Civil Code, interest is not demandable unless it has been expressly stipulated in writing.

If a lender cannot show a clear written stipulation for interest, the borrower can contest interest charges (though the principal remains due).

B. Courts can strike down or reduce unconscionable interest

Even without a strict usury ceiling across the board, Philippine jurisprudence recognizes that interest rates can be void or equitably reduced when they are unconscionable, iniquitous, or shocking—especially when bargaining power is unequal or terms are oppressive.

Common indicators courts consider:

Extremely high monthly rates (especially when combined with fees)
Borrower’s urgent necessity / lack of meaningful choice
Lack of clear disclosure
Penalty structures that quickly exceed the principal

Effect: The court may reduce the rate to a reasonable level and recompute the obligation.

C. Penalty clauses can be reduced (Civil Code on equitable reduction)

Even if the borrower “agreed,” courts may reduce:

Liquidated damages / penalties that are iniquitous or unconscionable
Penalties that are disproportionate to the breach
Situations where the borrower has partially complied or the lender’s actual loss is far less than the penalty

This is a major tool against “late fee + penalty interest + collection fee” piles.

D. “Interest on interest” and compounding are not automatic

Compounding and interest-on-interest require specific legal conditions and/or stipulations. Many app contracts are sloppy or ambiguous, which can matter when balances are ballooned through layering.

5) Truth-in-lending and disclosure problems (the hidden-cost issue)

Even when lenders are allowed to charge interest and fees, the law’s policy is that borrowers must be able to understand the true cost of credit.

Common disclosure failures in online lending:

Quoting only a “daily rate” without translating total cost
Advertising a low “interest” but imposing large “fees” upfront
Not presenting a clear schedule of payments before acceptance
Burying key terms in tiny text or after the borrower has effectively committed
Not stating effective rate, total finance charge, and what fees are for

Legal significance: Poor disclosure strengthens claims that charges are unfair/unconscionable and supports regulatory complaints.

6) SEC rules: Unfair debt collection practices (a major enforcement lever)

For SEC-regulated lending and financing companies, the SEC has issued rules and directives prohibiting unfair debt collection practices. Typical prohibited acts include:

Threats, intimidation, or harassment
Use of obscene/insulting language
Public shaming (posting the borrower’s debt to others, social media exposure)
Contacting the borrower’s friends, relatives, employer, or contacts to pressure payment in ways that are not necessary for legitimate communication
Misrepresenting authority (e.g., pretending to be law enforcement, court officers)
Threatening arrest for mere nonpayment of a debt (nonpayment of a civil debt is not a crime by itself)

Regulatory consequence: SEC can impose penalties, suspend/revoke registration, and issue cease-and-desist orders.

7) Data Privacy Act (RA 10173): why “contact access” and shaming are risky for lenders

Many abusive online lending models rely on phone permissions:

Access to contacts
Access to photos/files
Device identifiers, location, messages (sometimes)

Key privacy principles that get violated in abusive collection:

Transparency: borrower must know what data is collected and why
Legitimate purpose: data must be used only for a declared, lawful purpose
Proportionality: collect only what is necessary
Consent / lawful basis: “consent” obtained through bundled, take-it-or-leave-it permissions may be challenged as not meaningful, especially if excessive

Potential privacy violations in collection:

Messaging or calling contacts to pressure the borrower
Posting personal data or debt status publicly
Threatening to share photos or personal info
Using contact lists as leverage rather than for legitimate account verification

Consequences: complaints may be filed with the National Privacy Commission (NPC); violations can lead to administrative sanctions and, in serious cases, criminal exposure under the Act.

8) Criminal law touchpoints: when collection crosses the line

While nonpayment of debt is generally a civil matter, collection behavior can become criminal depending on conduct:

A. Threats, coercion, harassment

Grave threats / light threats (depending on the threat)
Grave coercion (forcing someone to do something through violence/threats)
Unjust vexation or similar harassment-type offenses (depending on facts and charging practice)

B. Defamation and cybercrime

Posting accusations online (“scammer,” “criminal,” etc.) can trigger libel, and if done through online channels, potentially cyber libel issues.

C. Extortion-like behavior

Threatening to release private information or contact employers/family unless paid can resemble extortion-type coercion depending on circumstances.

D. Identity and document misuse

Some collectors create fake “warrants,” “subpoenas,” or pretend to be government agents—this can implicate falsification or other offenses.

9) The “unconscionable” analysis in practice: how a claim is built

A. Compute the true cost of credit

To evaluate overcharging, focus on:

Principal actually received (net proceeds after deductions)
Total amount demanded (including interest, fees, penalties)
Time period (days/weeks/months)

Red flags:

Large upfront deductions (fees) relative to the loan
Repayment due very quickly with big “service charges”
Late penalties that scale daily and quickly exceed the net proceeds

B. Look for contract defects

Is the interest clearly stated in writing before acceptance?
Are fees itemized and explained?
Does the agreement clearly authorize penalty computations, compounding, and collection charges?
Are the terms presented in a readable, reviewable way (not just buried or changeable)?

C. Look for bargaining power imbalance

Apps often use standard form contracts, fast-click acceptance, and psychological urgency. These factors commonly support unconscionability arguments.

10) Borrower remedies and enforcement routes (Philippine context)

A. Civil remedies

Judicial reduction of unconscionable interest and penalties
Recomputation of the loan obligation based on reasonable rates and lawful charges
Possible damages if abusive acts caused harm (case-specific)

Venues may include:

Regular courts (collection suits, contract disputes)
Depending on the amount and rules, small claims may apply (though lenders often file; borrowers can raise defenses and counterclaims where allowed by procedure)

B. Administrative/regulatory complaints

SEC: for lending/financing companies and their unfair collection or abusive practices
NPC: for privacy violations (contact access misuse, public shaming, unauthorized disclosure)
DTI: if consumer protection issues apply (context-dependent; many pure loan products fall under financial regulation, but unfair trade practices can overlap in some scenarios)

C. Criminal complaints

Where threats, harassment, defamation, coercion, falsification, or cyber-related offenses exist, complaints may be filed with the prosecutor’s office, often with law enforcement support.

11) Evidence that typically matters (and why borrowers lose without it)

Because disputes often become “he said / she said,” documentation is crucial:

Screenshots of loan offer, disclosure screens, fee breakdown, repayment schedule
Proof of net amount received (bank/e-wallet transaction records)
Screenshots/recordings of collection messages, call logs, threats
Copies of any “demand letters,” especially if they misrepresent authority
Evidence of postings to social media or messages to contacts
App permission screens and privacy policy versions (if accessible)

12) Compliance benchmarks for legitimate lenders (what “good behavior” looks like)

A compliant online lender typically:

Clearly discloses total cost: interest, fees, effective rate, due dates
Limits penalties to reasonable levels and avoids “stacking” structures that explode
Uses respectful, truthful, non-deceptive collection communications
Avoids public shaming and does not weaponize contact lists
Minimizes personal data collection and uses it only for legitimate purposes
Maintains traceable corporate identity, SEC registration (where required), and accessible customer support

13) Key takeaways

In the Philippines, even without a universal interest cap, courts can reduce unconscionable interest and penalties and reject abusive or poorly disclosed charges.
SEC regulations are central against abusive online collection for lending/financing companies.
Data Privacy Act liability is a major risk area for apps that harvest contacts and shame borrowers.
Collection tactics involving threats, humiliation, impersonation, or public accusations can trigger civil, administrative, and criminal consequences.

This is general legal information for the Philippine setting and not individualized legal advice.