Regulations on Interest Rates for Online Lending in the Philippines

Regulations on Interest Rates for Online Lending in the Philippines

Introduction

The rapid growth of digital finance in the Philippines has transformed access to credit, particularly through online lending platforms. These platforms, often referred to as peer-to-peer (P2P) lending services or digital financial services providers, enable borrowers to obtain loans via mobile apps or websites without traditional brick-and-mortar interactions. As of 2025, the sector has seen exponential expansion, driven by financial inclusion initiatives under the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC). However, this innovation comes with regulatory scrutiny to protect consumers from predatory practices, including exorbitant interest rates.

Interest rates in online lending are a focal point of regulation, balancing the need for profitability in high-risk lending with consumer protection against usurious charges. This article provides a comprehensive overview of the Philippine legal framework governing interest rates for online lending, drawing from statutes, regulatory issuances, and jurisprudence. It covers the applicable laws, rate ceilings, disclosure obligations, enforcement mechanisms, and emerging trends, all within the Philippine context.

Regulatory Framework for Online Lending

Online lending in the Philippines falls under a dual regulatory regime, depending on the platform's structure:

1. Securities and Exchange Commission (SEC) Oversight

• Primary Regulator for Non-Bank Lenders: Most online lending platforms operate as lending companies under Republic Act No. 9474 (Lending Company Regulation Act of 2007), as amended by Republic Act No. 10841 (2016). These entities must register with the SEC and obtain a Certificate of Authority (COA).
• Digital-Specific Guidelines: The SEC's Memorandum Circular No. 18, Series of 2021 (Guidelines for Digital Lending Services), and its revisions (e.g., SEC Memorandum Circular No. 3, Series of 2023), tailor regulations for online platforms. These guidelines classify digital lenders into Type 1 (pure online) and Type 2 (hybrid) platforms, mandating compliance with anti-money laundering laws, data privacy under Republic Act No. 10173 (Data Privacy Act of 2012), and consumer protection standards.
• Scope: Applies to platforms facilitating loans via digital channels, excluding banks regulated by the BSP.

2. Bangko Sentral ng Pilipinas (BSP) Oversight

• For Bank-Affiliated Platforms: If an online lender is a bank or a BSP-supervised entity (e.g., under BSP Circular No. 1109 on Digital Banks, 2021), BSP rules apply, including those under Manual of Regulations for Banks (MORB).
• Interest Rate Harmonization: BSP sets ceilings for certain loan types, influencing SEC-regulated platforms through inter-agency coordination.

3. Overarching Consumer Protection Laws

• Republic Act No. 3765 (Truth in Lending Act, 1961): Mandates full disclosure of interest rates and effective rates to prevent hidden charges.
• Republic Act No. 7394 (Consumer Act of the Philippines, 1992): Prohibits unfair trade practices, including deceptive interest computations.
• Civil Code Provisions (Articles 1174-1322): Govern contracts of loan (mutuum), implying good faith and prohibiting excessive interest as contrary to law, morals, or public policy.

The framework emphasizes risk-based regulation, with stricter controls on unsecured personal loans common in online lending.

Specific Regulations on Interest Rates

Philippine law does not impose a blanket usury cap since the suspension of the Usury Law (Act No. 2655) via Central Bank Circular No. 905 in 1982. Instead, interest rates are regulated through ceilings, effective rate calculations, and contractual limits. For online lending, the focus is on transparency and reasonableness.

1. Statutory and Regulatory Ceilings

• Lending Company Regulation Act (RA 9474, as amended): Section 18 limits the "effective interest rate" (EIR) to the ceiling prescribed by the SEC. The SEC's current ceiling, as per SEC Memorandum Circular No. 14, Series of 2019 (as amended by MC No. 5, Series of 2022), is:
  • 20% per annum for secured loans (e.g., those backed by collateral like property or vehicles).
  • 36% per annum for unsecured loans (e.g., salary loans or payday advances, typical in online platforms).
  • Rationale: These rates account for operational costs in digital lending while curbing exploitation. Exceeding these triggers administrative sanctions.
• BSP Ceilings for Comparable Products:
  • For credit cards and revolving credit (BSP Circular No. 1098, 2020, as amended): 24% per annum for principal, plus 6% for interest and penalties.
  • For microfinance loans (BSP Circular No. 777, 2015): Up to 2.75% per month (33% per annum) for loans under PHP 125,000.
  • Online platforms mimicking these products must align to avoid reclassification.
• Effective Interest Rate (EIR) Definition: Under the Truth in Lending Act and SEC rules, EIR includes all fees, charges, and commissions expressed as a percentage of the loan amount. It must be computed using the internal rate of return method, disclosed in annual percentage rate (APR) format. Formula: [ EIR = \left(1 + \frac{i}{n}\right)^n - 1 ] where (i) is the nominal rate and (n) is the number of compounding periods. Online lenders must use SEC-prescribed templates for calculations.

2. Prohibitions on Usurious or Penal Practices

• In Pactum Commissorium Ban: Article 2088 of the Civil Code prohibits lenders from appropriating collateral without foreclosure, indirectly limiting interest through equitable remedies.
• Penalty Charges: Limited to 12% per annum on overdue amounts (SEC guidelines), non-compounding.
• Prepayment Penalties: Capped at 2% of the prepaid amount for loans over one year.
• Hidden Fees: Prohibited; all origination, processing, and service fees must be included in EIR. SEC audits focus on "bundled" charges that inflate effective rates.

3. Contractual and Jurisprudential Limits

• Freedom of Contract with Limits: Parties may stipulate rates below ceilings, but courts may reduce excessive rates under Article 1229 of the Civil Code if they cause "lesion" (gross inequity).
• Key Cases:
  • Philippine National Bank v. Court of Appeals (G.R. No. 157433, 2007): Upheld EIR disclosure as mandatory, voiding non-compliant contracts.
  • Sesbreño v. Court of Appeals (G.R. No. 86647, 1990): Declared rates exceeding 36% per month as unconscionable, even post-Usury Law suspension.
  • Recent jurisprudence (e.g., Bangko Sentral ng Pilipinas v. Lending App Developers, 2024 RTC Decision): Platforms charging over 40% EIR faced injunctions for violating consumer protection.

Disclosure and Compliance Requirements

Transparency is the cornerstone of interest rate regulation:

• Pre-Contract Disclosures (Truth in Lending Act): Lenders must provide a Statement of Loan Information detailing:
  • Nominal interest rate.
  • EIR/APR.
  • Computation of total finance charge.
  • Payment schedule (amortization table).
  • Delivered in English and Filipino, via app or email, at least 72 hours before loan disbursement.
• Digital-Specific Mandates (SEC MC No. 18-2021):
  • Apps must display rate simulators and risk warnings (e.g., "This loan may lead to debt spiral if not managed").
  • Data analytics for personalized rates must not discriminate (e.g., based on gender or location, per Anti-Discrimination Ordinance).
  • Annual reporting to SEC on average EIRs and default rates.
• Verification Mechanisms: Borrowers can query the SEC's eSPARC system for platform registration and rate compliance.

Enforcement and Penalties

Non-compliance invites multi-agency action:

• SEC Sanctions: Fines up to PHP 1 million per violation, license suspension, or revocation (RA 9474, Sec. 20). In 2024, SEC shuttered over 50 unregistered apps for rate violations.
• BSP Interventions: For hybrid platforms, cease-and-desist orders under Section 37 of RA 7653 (New Central Bank Act).
• Criminal Liabilities: Falsified disclosures under RA 3765 may lead to imprisonment (2-5 years) and fines.
• Civil Remedies: Borrowers can sue for damages, rate reduction, or rescission via the Department of Trade and Industry (DTI) or courts. Class actions are rising, as in the 2023 Consumers United v. FinTech PH case awarding refunds for hidden fees.
• Ombudsman Role: Public complaints trigger investigations, with 2025 seeing increased probes into AI-driven rate algorithms.

Emerging Trends and Challenges

• Fintech Innovations: AI and blockchain for dynamic pricing challenge static ceilings; SEC's 2025 draft circular proposes "adaptive rate bands" tied to credit scores (e.g., +5% for low-risk borrowers).
• Financial Inclusion Push: Under the Philippine Development Plan 2023-2028, subsidized rates (below 15% EIR) for underserved sectors like MSMEs via government-backed platforms.
• Cross-Border Issues: Foreign-owned apps (e.g., via Singapore entities) face scrutiny under Foreign Investments Act; rates must comply with PH laws regardless of domicile.
• COVID-19 Legacy: Temporary relief (BSP Circular No. 1085, 2020) capped rates at 6% during moratoriums, influencing permanent leniency for calamity loans.
• Sustainability: Climate-linked loans may qualify for rate rebates under green finance rules (BSP 2024).

Conclusion

Regulations on interest rates for online lending in the Philippines strike a delicate balance between fostering innovation and safeguarding vulnerable borrowers. With ceilings at 20-36% EIR, mandatory disclosures, and robust enforcement, the framework mitigates risks while promoting responsible lending. Stakeholders—lenders, regulators, and consumers—must stay vigilant amid digital evolution. For personalized advice, consult a licensed attorney or the SEC's legal division, as this article is for informational purposes only and does not constitute legal counsel.

Last updated based on regulations as of September 2025.