Here’s a practitioner-style, everything-you-need guide to unconscionable interest rates on loans in the Philippines—what “unconscionable” means in court, how to challenge or fix it, what rates apply if the clause is struck down, and the fastest practical remedies whether you’re a borrower, lender, or counsel. (As requested, no web search was used.)

Quick starting points (know these cold)

No fixed statutory ceiling on conventional interest: the Usury Law’s ceilings are long suspended (not repealed), so parties may stipulate rates—but not if they offend law, morals, good customs, public order or public policy (Civil Code arts. 1306, 1409).
Courts routinely void or reduce interest that is excessive, iniquitous, unconscionable. They may (a) strike down only the offending stipulation and (b) substitute it with the legal interest rate.
Written stipulation required: As a baseline, no interest is due unless expressly agreed in writing (Civil Code art. 1956).
Penalties and charges are separable: Even if the “interest” looks okay, penalty charges, late charges, liquidated damages, and add-on fees can be reduced if unconscionable (arts. 1229, 2227).
Judgment/“legal” interest: When courts replace an unconscionable rate or award interest on forbearance/damages without a valid stipulated rate, they apply the legal interest rate (modern doctrine: 6% per annum, simple interest), computed from the proper reckoning dates.

I. What makes an interest rate “unconscionable”?

“Unconscionable” isn’t a fixed number. Philippine courts use a totality-of-circumstances test:

Magnitude of the rate (per month and per annum), including effective rate after compounding/add-ons.
Borrower vulnerability: distress borrowing, unequal bargaining power, lack of meaningful choice, take-it-or-leave-it forms.
Transparency: Was the rate clearly disclosed? Any hidden fees that spike the effective APR?
Stacking: Interest plus penalty interest plus late charges plus “collection fees” (double/triple recovery).
Nature of the loan: payday/micro-loans vs. commercial lending; consumer vs. business.
Conduct: Harassing collection, bad faith, deliberate obfuscation.

Practice note: Courts often flag per-month figures (e.g., “4% per month”) that mask very high annual outcomes (48% p.a. before penalties). Add-on and compounding can push effective APR far higher than the headline rate.

II. Typical judicial outcomes when a rate is voided/reduced

When a court finds the interest/charges unconscionable, it may:

Sever the clause: Strike down the excessive interest (or penalty) while keeping the loan valid.
Substitute rate: Apply legal interest (simple, not compounded) on:
- the principal from demand or default, or
- from filing of the complaint (if the case is for collection), or
- from finality of judgment (for money judgments), depending on the claim’s nature.
Reduce penalties: Scale down penalty interest/late charges to a reasonable figure (Art. 1229 lets courts reduce iniquitous penalties even if agreed).
Disallow double recovery: If both regular interest and penalty interest are claimed on the same period, courts curb overlap.
Delete compounding unless clearly and validly agreed (see anatocism below).

III. Interest on interest (anatocism)

General rule: Interest does not earn interest unless there is an express written stipulation, or it is judicially demanded (then legal interest may run on the unpaid interest from demand).
Even with a stipulation, courts may still refuse compounding if the effective burden becomes unconscionable.

IV. Penalties, late charges, liquidated damages

A “penalty interest” (e.g., an extra 3% per month upon default) is legally a penalty clause. Courts can reduce it if iniquitous (Civil Code art. 1229), even without proof of actual loss.
Collection fees/attorney’s fees must be reasonable; courts often cut flat percentages (e.g., 25% of principal) when disproportionate (art. 2208).

V. When no valid interest stipulation survives—what rate applies?

If the stipulated rate is void/struck down, courts apply the legal interest rate to the principal.
Simple interest, 6% per annum is the modern benchmark used by courts for (a) loans/forbearance without a valid rate, and (b) judgments awarding sums of money.
Accrual depends on the nature of the claim:
- Loans/forbearance: From default/demand (extrajudicial demand date or complaint filing if none is shown).
- Damages (not loans): From judicial or extrajudicial demand, or finality of judgment (for unliquidated damages) per controlling jurisprudence.

Strategy: In pleadings, be explicit about the date of default (demand letter received, due date missed) to fix the accrual point.

VI. Special regulatory overlays (quick map)

Even though there’s no general ceiling, sector-specific rules may cap or police rates/fees and collection conduct:

Banks/credit card issuers, pawnshops, microfinance: Prudential and consumer-protection standards; certain caps or benchmarks may apply by circular (these change over time).
Lending and financing companies: Registration, disclosure, and fair collection rules (e.g., prohibitions on harassment, doxxing, contacting contacts).
Truth in Lending framework: Requires full disclosure of finance charges; non-compliance can support administrative liability, bolster civil claims, and affect credibility.

Because these caps/parameters are periodically adjusted, always check the current circulars/issuances for the specific product (credit card, salary loan, digital lending app) when advising on numbers.

VII. Practical borrower remedies (fastest to slowest)

A. Pre-litigation leverage

Paper trail & math
- Gather the contract/application, disclosure statements, statements of account, text/app screenshots, demand letters, and payment proofs.
- Compute the effective APR (annualize the monthly/biweekly rate, include add-ons, penalties, and any compounding). A clear APR table is persuasive.
Demand letter (with legal basis)
- Assert unconscionability; offer to pay the principal + reasonable legal interest; propose to waive questionable penalties/fees on both sides.
- For regulated entities, cite your intent to escalate to the proper regulator if unresolved.
Regulatory complaints (parallel track)
- Banks/EMIs → central bank consumer protection channel.
- Lending/Financing cos., online lending apps → corporate/securities regulator.
- Insurance-backed credit → insurance regulator.
- Harassment/privacy violations → data privacy authority; threats/doxxing → law enforcement/NTC.
- These don’t adjudicate the debt but create compliance pressure and curb abuses.

B. Court options

Small Claims (no lawyers required): For amounts within the jurisdictional threshold (currently high enough for many consumer loans). You can seek:
- Declaration that the stipulated interest/penalty is void/unconscionable;
- Re-computation at legal interest;
- Damages (modest) for bad-faith collection; and
- Injunction is not available in small claims—use regular civil action if you need injunctive relief.
Regular Civil Action (e.g., for annulment/reformation of contract, sum of money with re-computation, or declaratory relief):
- Ask the court to sever the rate, apply legal interest, reduce penalties, and disallow compounding and double recovery.
- Plead morals/public policy grounds and cite Civil Code arts. 1306, 1409, 1956, 1229, 2227; invoke jurisprudence consistently trimming oppressive rates.
Defensive use (if you’re the one sued):
- Raise partial nullity of the interest and penalties as affirmative defenses;
- Consign or tender the principal plus legal interest to stop further accrual and show good faith.

VIII. Lender/operator risk controls (if you’re drafting the product)

Keep the headline nominal rate and the effective APR in a reasonable band; avoid stacking multiple “penalties” that duplicate the same harm.
Provide plain-language disclosures with sample amortization tables.
Use simple interest; if compounding is needed, spell it out (frequency, base) and ensure the effective APR stays defensible.
Calibrate default charges to actual collection costs; avoid flat “25% attorney’s fees” unless justified.
Build hardship/forbearance options (grace, restructure) to reduce dispute frequency.
Train staff on lawful collection; record calls; prohibit shaming and third-party disclosure.

IX. How to do the numbers (litigation-grade re-computation)

Establish the base: Principal actually received (net of any front-loaded charges).
Strip out:
- Void/unconscionable interest beyond a reasonable level,
- Penalty interest that is iniquitous or duplicates regular interest,
- Compounding without clear written basis.
Substitute: Apply 6% p.a. simple legal interest on the principal from default/demand (or filing), then 6% p.a. from finality of judgment until full satisfaction (for judgment obligations).
Attorney’s fees: Only if justified by stipulation and court finding of bad faith; otherwise reasonable, not automatic.
Net out payments chronologically (first to interest, then to principal, unless stipulation/law dictates otherwise).

Tip: Present a clean before/after table. Judges respond well to math they can audit line-by-line.

X. Sample borrower demand paragraph (you can adapt)

“While we recognize our obligation to repay the principal, the stipulated [x% per month] interest, plus [y% penalty], compounded [weekly/monthly], is unconscionable and contrary to law, morals, good customs and public policy (Civil Code arts. 1306, 1409). Philippine jurisprudence consistently severs such stipulations and substitutes the legal interest. We therefore tender ₱[principal] plus 6% p.a. from [date of default/demand], less payments made, and request a corrected statement within 5 business days. We reserve our right to seek judicial relief, including reduction of penalties and costs, and to elevate collection misconduct to the proper regulators.”

XI. Red flags that often trigger judicial reduction

Per-month rates at levels that imply triple-digit effective APR after compounding.
Penalty interest equal to or higher than the regular rate (e.g., 5% + 5% per month upon default).
Front-loaded “processing fees” deducted from proceeds but still computing interest on the gross face amount.
Add-on insurance without opt-out; collection fees as a flat % of the entire obligation regardless of cost.
Harassing collection (public shaming, contacting employer/contacts, threats)—even if the debt is real.

XII. FAQs

1) Is an agreed 3% per month always valid? No. Context matters. Courts can still call it unconscionable, especially with compounding, stacked penalties, or vulnerable borrowers.

2) If the rate is voided, is the whole loan void? Typically no. Courts sever the rate and leave the principal enforceable, with legal interest substituted.

3) Can lenders charge interest on unpaid interest? Only with an express written stipulation (anatocism). Even then, courts can curb it if the effective burden becomes oppressive.

4) Are penalty charges on top of interest allowed? Yes, but reducible when iniquitous or duplicative (Civil Code art. 1229).

5) What if the lender never disclosed the effective rate? Poor disclosure strengthens an unconscionability theory and may trigger regulatory penalties; it also undermines credibility in court.

6) What should I pay while disputing? To show good faith and stop the clock on escalation: tender principal + 6% p.a. from default (net of prior payments), without prejudice to re-computation.

Bottom line

There is no general statutory cap, but Philippine courts police interest, penalties, and compounding for unconscionability and will replace abusive terms with legal interest (6% p.a.) and trim penalties.
The fastest wins come from clean documentation, credible math, and early tender of a corrected amount.
For lenders, transparent pricing and modest, defensible penalties are the best protection; for borrowers, a well-argued demand and a clear recomputation often resolve disputes without a full trial.

If you want, tell me the face loan amount, stated rate/fees, dates of release/default/demand, and payments made. I can compute a litigation-ready recomputation table (principal, legal interest, and reduced penalties) that you can attach to a demand letter or a small-claims complaint.