A comprehensive guide to what “usury” means today, how courts treat excessive interest and penalties, what regulators cap or control, and the remedies available to borrowers and lenders.

I. The Big Picture

There is no general statutory ceiling on loan interest in the Philippines. The Usury Law (Act No. 2655) still exists, but Central Bank (now BSP) Circular No. 905 (1982) suspended its interest ceilings.
Excessive charges are not automatically lawful. Even without a numeric cap, courts and regulators can strike down, reduce, or sanction interest and penalties that are unconscionable, iniquitous, contrary to morals, or abusive.
Key legal tools used by courts:
- Civil Code principles (autonomy of contracts Art. 1306; abuse of rights Art. 19–21; reduction of penalty Art. 1229; reduction of liquidated damages Art. 2227; written stipulation requirement for interest Art. 1956).
- Jurisprudence consistently invalidates or reduces interest rates (and penalty interest) that are shocking to conscience (e.g., 5%–7% per month and up, stacked with heavy penalties/compounding).
Sectoral caps exist. Some BSP and SEC rules cap or police rates and fees for specific products and institutions (e.g., credit cards, fringe lenders, fintech/online lending, microfinance). These change over time; product-specific caps apply even if the Usury Law ceilings are suspended.

II. When Is an Interest Rate Void or Reducible?

1) Unconscionability / Iniquity (Courts’ Equity Power)

Courts can annul or scale down interest (and penalty interest) when the effective charges are excessive relative to:

the principal and duration of the loan,
the borrower’s vulnerability,
stacking of interest + penalty + default charges + compounding, and
bad faith or predatory conduct.

Signals of unconscionability (fact-specific):

Monthly rates that mimic triple-digit APRs;
Compounded interest without clear, express agreement;
Penalty interest equal to or higher than the regular rate;
“Interest-on-interest” on unpaid interest absent a clear stipulation;
Hidden fees that act like extra interest (processing, service, facilitation) layered on top.

Typical judicial outcomes:

Reduce regular interest to a reasonable rate;
Void penalty interest or reduce it to a modest figure;
Disallow compounding and re-run the computation as simple interest;
If both sides acted in bad faith, offset damages or deny attorney’s fees.

2) Interest Must Be in Writing (Civil Code Art. 1956)

No written stipulation, no interest—only the principal is due (though courts may impose legal interest from judicial or extrajudicial demand as damages).

3) Penalty Clauses (Art. 1229 & 2227)

Courts can reduce penalties when iniquitous or unconscionable. Penalty interest is treated as a penalty, not compensation for forbearance, and is especially vulnerable to reduction.

4) Compounding / Interest-on-Interest

Compound interest requires an express, unequivocal agreement.
Capitalization of unpaid interest (so-called “interest-on-interest”) is not favored; courts restrict it, especially if it inflates the debt in a punitive way.

III. Regulators and Product-Specific Controls

Bangko Sentral ng Pilipinas (BSP) supervises banks and credit card issuers and can cap or condition rates and late fees for specific products (e.g., credit cards).
Securities and Exchange Commission (SEC) polices financing companies and lending companies, including online lenders, and can sanction abusive pricing, misdisclosure, and harassment in collections.
Truth in Lending (R.A. 3765) and Financial Consumer Protection Act (R.A. 11765) require clear disclosure of the effective cost of credit and protect against unfair practices.
Data Privacy and anti-harassment rules constrain collection tactics; abusive practices can void charges, trigger fines, and support damages claims.

Bottom line: Even if a numeric “usury” cap is suspended, industry-specific caps (e.g., credit cards) and consumer-protection rules can invalidate or limit charges.

IV. Practical Effects in Litigation and Collection

A. For Borrowers (Defensive & Offensive Tools)

Demand an accounting with a month-by-month ledger separating principal, regular interest, penalty interest, fees, and payments.
Invoke unconscionability to reduce rates and wipe or cut penalties/compounding.
Challenge undisclosed fees as void or part of interest (thereby inflating APR and supporting reduction).
No written interest? Pay principal plus legal interest as damages only from demand.
Harassment/abuse in collections → claim moral/exemplary damages, attorney’s fees, and regulatory relief (BSP/SEC complaints).

B. For Lenders (Compliance & Risk Control)

Clear, written stipulation of interest; state APR/effective rate and all fees; avoid vague “service charges.”
Keep interest reasonable; maintain separate and moderate penalty interest (not compounding).
Avoid automatic compounding unless explicitly agreed and periodically disclosed on statements.
Document consent (wet or e-signature) and deliver disclosures (TILA-compliant).
Train collectors: no public shaming, contact blasting, or threats—these create regulatory and civil exposure and invite judicial rate-cutting.

V. Computing What’s Owed (A Court-Friendly Method)

Start with principal actually received.
Apply simple interest at the stipulated rate (or reasonable rate if reduced) up to default.
From demand (or filing), apply legal interest (currently civil jurisprudence uses 6% p.a. unless later changed) on the total amount due as damages; avoid “interest-on-interest” unless clearly allowed.
Penalties: apply only if expressly stipulated and not unconscionable; compute separately and non-compounding unless expressly agreed.
Allocate payments first to interest/penalties only if the contract clearly says so; otherwise, to interest first, then principal (default civil-law approach).
Attorney’s fees: allowable if stipulated and reasonable; courts often reduce lump-sum percentages.

VI. Sample Clauses (Safe(r) Drafting)

Interest Clause (simple): “The Loan shall earn interest at __% per annum, computed on a simple-interest basis. Interest accrues daily and is payable monthly.”
Penalty Interest (moderate): “Upon default, a penalty interest of __% per annum shall accrue on unpaid principal only, in addition to regular interest, until full payment.”
No Compounding (unless allowed): “Interest shall not be compounded. Unpaid interest shall not itself earn interest, unless the parties later agree in writing after such interest falls due.”
Disclosure & Allocation: “All fees are disclosed in the Disclosure Statement. Payments apply first to interest, then to principal.”

VII. Common Scenarios & Outcomes

Payday/instant-loan apps: Courts and regulators scrutinize processing fees + short tenors that yield triple-digit APRs; penalties and harassing collection are often voided; principal and reasonable interest only.
Micro-SME loans with rolling renewals: “Evergreen” renewals that capitalize unpaid interest are recast to simple interest, with penalty cuts.
Pawn & secured lending: Charges must fit the governing product rules; illegal add-ons treated as interest → reduction possible.

VIII. Enforcement, Defenses, and Remedies

If sued for collection: Answer with unconscionability, lack of written stipulation, misdisclosure, illegal compounding, and regulatory violations; ask for judicial recomputation.
If you are the lender: Plead and prove delivery of principal, clear stipulations, proper disclosures, reasonable rates, and lawful collection; be ready for court-ordered re-pricing.
Criminal exposure: “Usury” per se is not prosecuted because ceilings are suspended, but fraud, falsification, estafa, data-privacy and anti-harassment violations can attach to abusive schemes.
Administrative complaints: BSP (banks/credit cards), SEC (lending/financing companies), DTI (unfair trade practices), and NPC (data/privacy abuses).

IX. Checklist

Borrowers

Is the interest in writing?
Are there hidden fees functioning as extra interest?
Do terms compound without clear consent?
Are penalties disproportionate to the delay?
Prepare a clean timeline and recomputation at simple interest.

Lenders

Product complies with BSP/SEC caps (if applicable).
APR and all fees clearly disclosed and consented.
Penalty moderate, non-compounding; no harassment in collections.
Maintain full ledgers and furnish periodic statements.

X. Key Takeaways

No general numeric cap today—but abusive rates are not safe: courts cut or void them under Civil Code and case law.
Write it down: no written interest, no interest—only legal interest from demand.
Penalties and compounding are prime targets for reduction; keep them modest and clear.
Regulatory caps may apply by product (credit cards, certain lenders); violating them invites sanctions and rate rollback.
Whether borrower or lender, transparent disclosure, reasonable pricing, and lawful collection practices are the safest path.

This article offers general legal information, not legal advice. Specific outcomes depend on your contract language, product type, regulatory status, and the court’s assessment of reasonableness and proof.