Regulation of Interest Rates in Online Lending Apps in the Philippines

1) Big-picture overview

Online lending in the Philippines sits at the intersection of interest-rate liberalization (the old Usury Law ceilings were suspended in the 1980s), modern consumer-protection rules, and sector-specific caps for particular products. In short:

There is no universal, across-the-board interest-rate ceiling on all loans.
Specific caps exist for certain products (e.g., small, short-term unsecured consumer loans; credit cards).
Even where no fixed cap applies, courts can strike down “unconscionable” rates and reduce them.
Online lending platforms (OLPs) must be tied to a properly licensed lending company or financing company and comply with disclosure, data-privacy, AML, and fair-collection rules.

This article maps the full legal landscape for interest-rate setting in online lending apps operating in (or targeting) the Philippines.

2) Institutional and legal framework

Primary regulators & regimes

Securities and Exchange Commission (SEC)
- Regulates lending companies (under the Lending Company Regulation Act of 2007, R.A. 9474) and financing companies (under the Financing Company Act of 1998, R.A. 8556).
- Issues rules for Online Lending Platforms (OLPs), disclosure, licensing, and prohibited collection practices.
- Can suspend/revoke certificates of authority and penalize violations.
Bangko Sentral ng Pilipinas (BSP)
- Regulates banks, quasi-banks, credit card issuers, payment system operators.
- Issues product-specific caps (e.g., credit card finance charges) and disclosure rules for BSP-supervised institutions.
- Oversees market conduct for supervised entities (BSP Consumer Protection Standards).
National Privacy Commission (NPC)
- Enforces the Data Privacy Act of 2012 (R.A. 10173), crucial for how apps handle contacts, photos, geolocation, and device data.
Anti-Money Laundering Council (AMLC)
- Lending and financing companies are covered persons under the AMLA (R.A. 9160, as amended): KYC, record-keeping, and reporting (CTR/STR).

Foundational statutes affecting pricing and disclosures

Usury Law (Act No. 2655): ceilings suspended via Central Bank circulars—meaning pricing freedom, subject to special caps and unconscionability limits.
Truth in Lending Act (TILA, R.A. 3765): requires clear disclosure of finance charges and the effective cost of credit before consummation.
Civil Code: courts may reduce iniquitous or unconscionable interest and penalty charges; jurisprudence repeatedly knocks down sky-high rates.
Consumer protection rules (BSP/SEC): govern marketing, disclosures, complaint handling, and fair treatment.

3) Where hard caps exist

A) Small, short-term unsecured consumer loans (typical “salary-loan” via apps)

Regulators have imposed specific ceilings for small, short-tenor loans (e.g., not exceeding a low peso threshold and a short maturity). Typical structure (summarized):

Nominal interest rate cap per month;
Effective interest rate (EIR) cap per month (captures interest + mandated/allowed fees);
Cap on total fees per month; and
Cap on late charges (often expressed as a monthly percentage ceiling).

These caps apply to lending companies, financing companies, and microfinance NGOs for unsecured consumer loans of small amount and short tenor—the archetypal “quick cash” app loans. Exceeding the cap can trigger SEC enforcement (administrative penalties; suspension/revocation) and civil remedies for borrowers.

Practitioner tip: App pricing engines must compute the EIR (not just “monthly rate”), because all interest and chargeable fees must fit within the cap’s EIR limit. If a fee is required to obtain the loan (processing, service, disbursement, platform fee), treat it as part of the finance charge unless expressly excluded.

B) Credit cards

BSP maintains a separate ceiling for credit card finance charges (monthly interest) and late payment fees issued by BSP-supervised entities. While many app-based lenders are non-card products under SEC jurisdiction, some fintechs partner with banks for card-like products—then the BSP card caps apply.

4) Where no fixed cap applies

For loans outside the product-specific caps (e.g., larger or longer-term cash loans, secured loans, SME working capital, merchant cash advances):

No universal rate ceiling—pricing is market-based.
However, interest and penalty charges remain subject to:
- TILA disclosures (transparency of EIR/APR and total finance charge);
- Unconscionability doctrine—Philippine courts routinely reduce excessive rates/penalties (and sometimes void them) if found iniquitous;
- Unfair or abusive acts standards under regulator conduct rules.

Borrowers retain remedies (civil actions; defenses against collection) and may complain to the SEC, BSP, NPC, or DTI depending on the lender and issue.

5) What counts toward the Effective Interest Rate (EIR)

To stay compliant, compute EIR correctly:

Include: stated interest; required, non-refundable processing/service/platform fees; disbursement fees deducted from proceeds; convenience fees that are a condition for obtaining or maintaining the loan.
Exclude (typically): government taxes such as Documentary Stamp Tax (DST) when borne by borrower and clearly itemized; optional third-party insurance (if truly optional and separable); late charges (handled separately under “penalties”).
Present: the periodic rate (e.g., per month) and the annualized measure (APR/EIR) using standard amortization math, with a sample computation in the disclosure.

Late/penalty charges are subject to separate caps (where applicable) and must be disclosed with clear triggers, cure periods, and computation examples.

6) Online Lending Platform (OLP)–specific rules that affect rates

You cannot launch an OLP unless a licensed Lending/Financing Company (L/FC) stands behind it. The SEC requires the L/FC’s Certificate of Authority, corporate details, and registration of the OLP itself.
The OLP must prominently display the L/FC’s registered name, business address, SEC registration number, Certificate of Authority number, contact channels, and product pricing (rates and fee tables).
Only the licensed entity may set and receive interest/fees. Revenue sharing with the platform must be documented; embedded fees charged by the platform are typically treated as finance charges for EIR purposes if required to obtain the loan.
Prohibited collection practices (e.g., harassment, threats, public shaming, contacting people in the borrower’s phonebook not named as referees, contacting employer without consent/authorization) expose the L/FC to SEC sanctions—even if committed by third-party collectors or the app vendor.

7) Data privacy constraints on app-level pricing and collections

Under the Data Privacy Act and NPC guidance:

Data minimization: request only permissions necessary to deliver the service. Blanket access to contacts, photos, SMS, location without a concrete, lawful purpose triggers risk.
Lawful basis & consent: obtain informed consent for processing (including profiling for pricing, automated decision-making) and state the purpose and retention periods.
Transparency: privacy notice must explain what data affects pricing and the logic of automated decisions “in simplified form.”
Debt collection: using contact lists to shame borrowers is a violation; expect NPC complaints, fines, and potential criminal exposure for malicious disclosure/unauthorized processing.

8) Advertising and disclosure do’s & don’ts for apps

Don’t market a teaser “0% monthly” if any mandatory fee converts the real cost above 0%.
Do show a pricing box in-app and on the website: loan amount, term, monthly rate, APR/EIR, itemized fees, total to repay, sample amortization.
Do present pre-contractual disclosures before the borrower commits (and allow them to download/email the terms).
Don’t hide fees in “net proceeds.” If you net off fees from disbursement, the EIR increases—and you must disclose the gross/face amount, net proceeds, and effective cost.

9) Court treatment of excessive interest and penalties

Even without a universal cap, Philippine jurisprudence routinely reduces interest and penalty charges that are “iniquitous or unconscionable.” Key takeaways for lenders:

Courts have struck down very high rates (e.g., >36% p.a. plus heavy penalties) where facts show overreach or lack of real negotiation.
If interest is voided or reduced, legal interest (currently 6% per annum for loans/forbearance and judgments) typically substitutes from the point specified by case law.
Penalty charges may also be reduced under the Civil Code when excessive relative to actual loss.

For product design, it’s prudent to stress-test rates and late charges against this doctrine, even when a specific regulatory cap does not apply.

10) Taxes that affect pricing (pass-through and disclosures)

Documentary Stamp Tax (DST) applies to loan instruments (typically ₱1.00 for every ₱200 of the principal or fraction thereof).
Show DST as a separate line item; if the lender nets DST from proceeds, reflect the net proceeds and the effect on EIR.
Withholding taxes on interest may apply depending on borrower type and instrument; these generally affect cash flows and should be considered in APR/EIR computations when borne by the borrower.

11) AML/KYC impact on digital onboarding and pricing

Know-Your-Customer rules apply: capture valid IDs, perform screening, and monitor transactions.
E-KYC is allowed with risk-based controls; verify that your process meets AMLC and, where relevant, BSP KYC standards.
Pricing models using risk-based pricing are acceptable, but the inputs must be lawfully obtained and fairly used (avoid proxies that create discriminatory outcomes).

12) Cross-border and marketplace considerations

A foreign app lending into the Philippines is generally “doing business” and needs proper SEC registration and licensing (or an authorized local partner).
Choice-of-law and forum clauses do not immunize lenders from Philippine mandatory consumer, privacy, and AML rules if targeting Philippine residents.
App-store distribution often requires proof of SEC authorization for Philippine-facing lending apps.

13) Enforcement landscape

Regulators have:

Delisted non-compliant apps and revoked certificates of authority of abusive/illegal lenders;
Issued cease and desist orders for violations (unlicensed lending, overcharging beyond caps, unfair collection, data-privacy abuses);
Coordinated with app stores and platforms to take down rogue apps;
Pursued administrative fines and criminal referrals in serious cases.

Civil suits and class-type actions (consumer groups) have also challenged unconscionable pricing and harassment.

14) Practical compliance checklist for online lending apps

License & OLP registration
- Ensure the lending/financing company holds a valid Certificate of Authority and the OLP is properly registered.
Product scoping against caps
- If offering small, short-term unsecured loans, hard-code the nominal, EIR, fee, and late-charge caps in pricing logic.
- Maintain versioned pricing tables and automated EIR calculators.
TILA-grade disclosures
- Present APR/EIR, itemized fees, sample amortization, net proceeds, and total repayment before acceptance.
- Provide downloadable (or emailed) contract + disclosure statement.
Collections
- Implement a written policy banning harassment/shaming; whitelist allowed contact methods; audit third-party collectors.
- Provide grace periods and clear fee triggers.
Data privacy
- Use data minimization: no blanket contact-list scraping; explain automated decisioning in plain language.
- Secure consents, maintain DPIAs (data protection impact assessments), and honor data subject rights.
Governance & complaints
- Set up complaints handling with response timelines; log and resolve disputes.
- File required regulatory reports (SEC/BSP/AMLC).
Testing & monitoring
- Run EIR reconciliation tests on live loans; investigate outliers.
- Periodically benchmark rates vs. jurisprudence risk (avoid “headline” rates that could be viewed as punitive).

15) Frequently asked questions

Q1: Can an app charge “processing” or “platform” fees on top of interest? Yes—but if the fee is required to get the loan, treat it as part of the finance charge for EIR. Ensure total pricing remains within any applicable caps and is clearly disclosed.

Q2: If a borrower pays late, can the app compound penalties? Avoid compounding. Use simple late charges within the specified monthly cap, disclose the trigger and computation, and apply the Civil Code standard of reasonableness.

Q3: Are “tips” or “optional donations” allowed to bypass caps? If “optional” amounts become expected or are necessary for approval, regulators will treat them as finance charges—risking cap breaches and unfair-practice findings.

Q4: Can dynamic (risk-based) pricing be used? Yes, but ensure lawful data sources, non-discriminatory variables, and clear disclosures. Keep audit trails for pricing decisions.

Q5: What happens if a court finds the interest unconscionable? Courts may void or reduce the rate and substitute the legal interest (currently 6% p.a. for forbearance/judgments), and may also cut penalty charges.

16) Key takeaways

No blanket cap overall, but there are binding caps for certain app-style small loans and credit cards.
Everything hinges on the EIR—build compliance into pricing engines and disclosures.
Unconscionability is a real backstop: set rates that survive court scrutiny.
Robust OLP licensing, privacy, collections, and AML controls are as important as the rate itself.

(Non-exhaustive) model clauses & controls you can adapt

Pricing clause: “The Effective Interest Rate (EIR), inclusive of all required fees, shall not exceed the applicable regulatory ceiling. The Borrower acknowledges receipt of the Pre-Contractual Disclosure Statement showing the EIR, total finance charge, and net proceeds.”
Late-charge clause: “A late charge not exceeding the monthly cap, computed on the unpaid amount only, shall apply after a grace period of ___ days.”
Collections policy: “No harassment, threats, shaming, or third-party contact beyond named referees. All agents must use approved scripts and recorded channels.”
Privacy notice snippet: “We use automated decisioning to assess creditworthiness. Key factors include repayment history, verified income, and app transaction behavior. You may request a simplified explanation of the logic and contest an automated decision.”

Final note: The exact numeric caps, thresholds (amount/tenor), and fee/penalty limits are set by current circulars and memoranda. When implementing or auditing an app, confirm the latest SEC/BSP issuances and jurisprudence and align your pricing engine and disclosures accordingly.