A doctrine-grounded, practice-oriented guide for borrowers, lenders, and counsel

1) The short answer

The Philippines no longer has fixed, across-the-board usury ceilings. Statutory ceilings under the Usury Law (Act No. 2655) were suspended decades ago, so parties may stipulate interest rates by agreement. But courts and regulators still strike down “usurious in effect” rates—i.e., unconscionable, iniquitous, or shockingly high—and will reduce or nullify them, along with penalty charges and abusive compounding. So, while there’s no fixed cap, there is a prohibition against unconscionable interest and hidden/undisclosed charges.

2) Legal backbone (plain language)

Usury Law (Act No. 2655): once set caps; ceiling provisions are suspended. The law still matters for concepts (e.g., interest must be expressly stipulated in writing).
Civil Code:
- Art. 1306 (freedom to contract) tempered by law, morals, good customs, public order, or policy.
- Art. 1956: no interest is due unless expressly stipulated in writing.
- Arts. 1229 & 2227: courts may reduce penalties/liquidated damages if iniquitous or unconscionable.
- Arts. 19–21: abuse of rights; damages for bad faith/inequitable conduct.
- Art. 2209 et seq.: monetary interest as damages (“legal interest”) on forbearance/loans.
Supreme Court doctrine (consistent line of cases): Even absent statutory caps, courts annul or reduce excessive interest and stacked penalties; “unconscionable” is assessed case-by-case (rate level, disclosures, bargaining power, context).
Truth in Lending Act (R.A. 3765): requires clear, prior disclosure of total finance charge and effective/annual rate; hidden fees are unlawful.
Financial Consumer Protection Act (R.A. 11765): bans abusive collection and unfair contract terms; enables regulators to order refunds, disgorgement, and sanctions.
Sector-specific rules: Regulators may periodically set caps for specific products (e.g., credit cards, certain short-term consumer loans) or require specific pricing conduct. Always check the current circulars for your product class.

3) What makes an interest rate “usurious in effect”

Courts do not rely on a fixed number; they weigh totality:

Rate magnitude and structure
- Nominal rate vs. effective rate once all fees and net-proceeds disbursement are considered.
- Front-loaded “processing” fees, “daily maintenance,” or add-on schemes that inflate the true cost.
Penalty stacking and compounding
- Penalty interest on top of normal interest; interest-on-interest without lawful basis; pyramiding (penalty on penalty).
- Compounding is generally disfavored unless clearly stipulated and lawful; even then, courts may cut it back if oppressive.
Disclosure and consent
- Lack of pre-contract disclosure of the effective rate and all charges; fine-print surprises; net-proceeds lending that hides the real APR.
Context and bargaining
- Adhesion contracts; vulnerable borrowers; take-it-or-leave-it terms; emergency lending; imbalance of sophistication.
Conduct
- Heavy-handed or abusive collection; threatening behavior; contact-blasting; shaming—these aggravate unconscionability and justify damages.

Results in court typically include: (a) voiding the unconscionable rate/penalties, (b) recomputing at a reasonable rate (often the legal interest benchmark), (c) disallowing compounding, (d) refunds of overcollections, and sometimes (e) moral/exemplary damages and attorney’s fees.

4) Interest, penalties, and compounding—what’s allowed

Stipulated interest is valid if in writing and not unconscionable.
Penalty charges (late fees/penalty interest) are not per se illegal, but courts slash them when excessive or pyramided.
Compounding (“interest on interest”) is restricted: generally, interest does not earn interest unless (i) there’s an express stipulation and (ii) the interest is already due and demanded; even then, courts may curb it on equity.
Default interest vs. penalty: Label doesn’t control; courts look at substance. Multiple layers (regular + default + penalty + collection “fees”) are prime targets for reduction.

5) Consumer-protection overlay (even with freedom to contract)

Disclosure: The effective rate (annualized) and total finance charge must be prominently disclosed before you commit.
No hidden fees: “Convenience,” “system,” “verification,” or “agent” fees that increase cost must be stated up front and counted in the finance charge.
Fair collections: Threats, doxxing, contact-blasting, and shaming are illegal; they also bolster claims of bad faith and damages.
Regulatory caps: For certain products (e.g., credit cards), regulators have from time to time set numerical caps on finance charges and certain fees. Treat those as hard limits where applicable.

6) Documentation requirements (to charge interest lawfully)

A lender who wants to enforce interest must show:

A written contract signed by the borrower with the interest rate and all fees itemized;
Disclosure of the effective rate/finance charge before consummation;
Amortization schedule or payment terms;
Records of demands, payments, and application of payments (principal vs. interest vs. penalties).

Missing or inconsistent paperwork invites recomputation and disallowance of disputed charges.

7) Sample recomputation logic (how courts/mediators often fix it)

Strip unconscionable interest and illegal fees.
Apply payments first to interest (at a reasonable/legal rate), then to principal, unless the contract/law requires otherwise; forbid unauthorized compounding.
On any balance, impose legal interest (as damages for forbearance) from the date of judicial demand or default, per standard rules.
If the lender’s conduct was abusive, consider damages and attorney’s fees.

Practice pointer: Present a side-by-side table: lender’s computation vs. court-compliant recomputation—judges appreciate clarity.

8) Typical red flags (likely to be cut down or voided)

Sky-high “monthly/daily” rates that explode when annualized.
Net-proceeds releases (fees deducted upfront) without recalculating the effective rate.
“Penalty interest” equal to or higher than the main rate; penalty on penalty.
Evergreen extensions/rollovers with new fees each cycle.
No pre-contract disclosure; vague ToS linking to changing web pages.
Collections via public shaming or threats.
Payments to personal e-wallets or third-party accounts with no disclosed agency.

9) Remedies for borrowers

Regulatory

File complaints with the relevant regulator for hidden fees, abusive collections, or unlicensed lending. Remedies include refunds, cease-and-desist, and administrative penalties.

Judicial

Civil action to annul/reduce unconscionable interest and penalties; seek recomputation, refund, damages, and attorney’s fees.
Defensive use: as a counterclaim or defense in collection suits—ask the court to void/reduce rates and dismiss deficiency claims based on unlawful computations.

Negotiation

Propose to settle on principal + reasonable interest, with waiver of unlawful fees/penalties and clean closure letter.

10) Compliance checklist for lenders (stay out of trouble)

License/authority (if a lending/financing company or supervised entity).
Clear disclosures: show effective annual rate and total finance charge before acceptance; itemize all fees.
Reasonable pricing: avoid stacked penalties and pyramiding.
Contract hygiene: written, signed, and consistent; no vague cross-references to mutable URLs for key economic terms.
Collections code: no threats, no third-party shaming; written authority for agents.
Record-keeping: maintain amortization and ledgering that can withstand court scrutiny.
Sector caps: if your product is subject to a regulatory cap, implement system controls to prevent breaches.

11) Practical playbooks

11.1. Borrower’s action plan (dispute an iniquitous loan)

Gather contract, receipts, screenshots of disclosures, ledger, and demands.
Prepare an effective-rate worksheet (principal vs. net proceeds; add all fees).
Send a written dispute demanding recomputation and cessation of abusive collection.
If ignored, file with the regulator and/or sue for reduction/annulment, refunds, and damages.

11.2. Lender’s action plan (defend a rate)

Show full pre-contract disclosures (effective rate and finance charge).
Demonstrate negotiation or choice (alternatives offered; no surprise terms).
Prove no pyramiding, no hidden fees, and lawful compounding (if any).
If a rate is at risk of being cut, consider settlement early to minimize damages exposure.

12) Frequently asked questions

Q: If there’s no cap, can parties agree to any rate? A: They can agree, but courts can void or reduce unconscionable rates and stacked penalties, and regulators can sanction unfair practices.

Q: I signed a contract with a very high rate. Am I stuck? A: Not necessarily. If the rate/penalties are iniquitous, courts often recompute to a reasonable rate and disallow abusive fees.

Q: Is verbal agreement to pay interest enforceable? A: No. Interest must be in writing. Without a written stipulation, only legal interest as damages may be imposed in proper cases.

Q: Can interest earn interest? A: Generally no, unless expressly agreed after interest becomes due; even then, courts may limit compounding if oppressive.

Q: Are credit cards or short-term loans capped? A: Sometimes. Regulators have from time to time imposed product-specific caps (e.g., on credit-card finance charges and certain fees). Always check current rules for your product.

13) Model clauses (fairer drafting)

Transparent pricing clause

“The Total Finance Charge and Effective Annual Rate for this loan are disclosed on the face page prior to acceptance. No fees or charges other than those itemized will be imposed. Any amendment that increases the cost of credit takes effect only after written consent.”

Penalty reasonableness clause

“Upon default, a single penalty charge of [x% per month or flat ₱_] applies, non-compounding, and shall not be imposed on amounts already subjected to penalty.”

No pyramiding clause

“Penalty charges shall not earn interest, and no penalty-on-penalty shall be imposed.”

14) Takeaways

There’s no fixed nationwide usury cap, but unconscionable interest and hidden fees won’t be enforced.
Interest must be in writing; penalties and compounding face strict scrutiny.
Disclosures and fair collection are mandatory; violations trigger recomputation, refunds, and damages.
For some products, regulators set caps—treat them as hard limits.
In disputes, clarity and math win: show the effective rate, strip unlawful charges, and apply reasonable/legal interest moving forward.

This guide is for general information only and not legal advice. Facts, contracts, and product-specific regulations will determine outcomes; consult counsel for case-specific strategy and to confirm current sector caps, if any, that may apply to your loan product.