Usurious Interest and Unconscionable Penalties: How to Contest Illegal Lending Rates in the Philippines

Bottom line: Although statutory interest ceilings under the old Usury Law are no longer in force, Philippine courts still strike down or reduce interest and penalty charges that are excessive, iniquitous, or unconscionable. Borrowers can challenge such stipulations in court or before regulators and obtain re-computations at reasonable rates.

1) The Legal Landscape

1.1 Usury Law vs. Central Bank/BSP Circulars

Act No. 2655 (Usury Law) historically fixed interest ceilings.
Central Bank Circular No. 905 (1982) suspended those ceilings, so no hard numeric cap exists today.
Important nuance: The Usury Law itself was not repealed in full. Courts therefore review the reasonableness of rates and invalidate or reduce unconscionable stipulations under the Civil Code and jurisprudence.

1.2 Civil Code Anchors

Freedom to contract (Art. 1306) is limited by law, morals, good customs, public order, and public policy.
Interest must be in writing (Art. 1956). If not, only legal interest may apply.
No interest-on-interest unless expressly stipulated and allowed by law (Arts. 1959–1960); even then, courts may curb abusive compounding.
Penalty clauses may be equitably reduced when iniquitous or unconscionable (Arts. 1229, 2227).

1.3 Legal (Judicial) Interest

Philippine jurisprudence presently pegs legal interest at 6% per annum (both pre- and post-judgment for loans or forbearance of money), subject to the controlling line of cases. This applies when:
1. there is no valid written stipulation, or
2. the stipulated rates/penalties are reduced by the court.

1.4 Leading Case Themes (What Courts Actually Do)

Across many Supreme Court cases, courts have:

Struck down rates such as 3%–6% per month (36%–72% p.a.) and penalty charges stacked on top, as unconscionable;
Reduced interest and penalties to reasonable levels (often to legal interest or lower negotiated rates);
Void(ed) compounding or “interest-on-interest” where not expressly and validly stipulated or where oppressive;
Applied equitable considerations, including the borrower’s distress, one-sided contracts, and the combined burden of interest plus penalties plus other fees.

2) What Makes a Rate “Unconscionable”?

Courts decide case-by-case, considering the total economic burden on the borrower, not just the headline rate:

Magnitude of the rate
- Monthly rates of 3%–6% (or more), especially compounded, usually trigger scrutiny.
- Short-term payday/“salary” loans showing triple-digit effective annual rates (EAR) are red flags.
Stacking of charges
- High interest plus penalty interest (e.g., 3%–5% per month on arrears) plus late fees, processing fees, or collection charges can be oppressive in the aggregate.
Compounding practices
- Monthly compounding (or more frequent) at high rates can balloon the obligation to levels courts find shocking to conscience.
Borrower’s circumstances & bargaining power
- Adhesion contracts, take-it-or-leave-it mobile lending app terms, emergency borrowing, and lack of meaningful disclosure strengthen claims of unconscionability.
Disclosure & transparency
- Failure to clearly disclose the annualized cost, total finance charges, and penalties before consummation undermines enforceability and supports equitable reduction.

3) Penalties vs. Interest: Different Tools, Same Scrutiny

Interest compensates for the use or forbearance of money.
Penalty is a contractual punitive amount for delay/default in addition to interest.
Even if a penalty is clearly written, courts routinely reduce penalty rates that are excessive (e.g., 2%–5% per month on top of already high interest).
Double punishment (high interest + high penalty + default interest + late fees) is prime territory for judicial trimming.

4) Regulatory Cross-Checks (Who Regulates Whom)

Banks and quasi-banks → Bangko Sentral ng Pilipinas (BSP).
Lending/financing companies & online lending apps → Securities and Exchange Commission (SEC) (licensing, enforcement against abusive collection).
Cooperatives → Cooperative Development Authority (CDA).
Data privacy violations / harassment (e.g., contact-list scraping, doxxing) → National Privacy Commission (NPC).
Financial Consumer Protection Act (FCPA, R.A. 11765) strengthens the BSP/SEC/IC powers to act against abusive practices and deceptive disclosures.

Note: While high rates alone are generally not criminal after the suspension of usury ceilings, abusive collection practices (threats, shame-based tactics, data privacy breaches) can invite administrative sanctions and, in extreme cases, criminal liability under other laws (e.g., anti-harassment, grave threats, cybercrime, privacy).

5) Practical Grounds to Contest

Use one or several of these in your suit or regulatory complaint:

Unconscionable/iniquitous interest
- Ask the court to nullify or reduce the agreed rate to legal interest (6% p.a.) or another reasonable rate.
Unconscionable penalties
- Seek equitable reduction of penalty interest/late fees under Arts. 1229 & 2227.
No written stipulation (Art. 1956)
- If the note/contract doesn’t state interest in writing, only legal interest applies.
Unfair compounding
- Attack interest-on-interest that is not expressly and clearly stipulated, or that is oppressive in effect.
Lack of disclosure / deceptive practices
- Cite disclosure failures (e.g., non-transparent annualized cost of credit), contrary to consumer-protection standards.
Public policy & adhesion contracts
- Argue the contract is contrary to morals/public policy when it enables predatory lending or shame collection.

6) Evidence Checklist

Gather early—many cases turn on documents and arithmetic:

Promissory note / loan agreement (full terms, rate, penalties, compounding).
Disclosure statement and amortization schedule.
Payment proofs (receipts, fund transfers, e-wallet logs).
Account statements and collection letters (to show stacking/compounding).
Screenshots of app permissions/terms and collection messages (for harassment/privacy claims).
Call/SMS/chat logs and witness statements.
Computation worksheets (to demonstrate the burden and your proposed re-computation).

7) How Courts Re-Compute

7.1 Typical Re-Computation Flow

Start with principal actually received (net of any withheld “processing fees” that function as hidden interest).
Apply a reasonable interest (often 6% p.a. if the stipulation is void/reduced).
Disallow or trim penalty interest/late fees to reasonable levels (or zero if oppressive).
Credit all payments first to interest, then to principal, unless the parties validly agreed otherwise; courts may disregard one-sided allocation rules.
Post-judgment interest at 6% p.a. on the final amount due until full payment.

7.2 Sample Comparison (Illustrative Only)

Original term: ₱50,000 loan, 5%/month interest, 3%/month penalty on any arrears, monthly compounding.
Court-adjusted: treat compounding as invalid; reduce interest to 6% p.a. simple, disallow penalty or reduce to a token amount (e.g., 1% per month only on the amount in delay), then recompute and offset payments. The net due typically drops dramatically.

8) Remedies & Where to File

8.1 Civil Actions

Action for sum of money with re-computation, or declaratory relief, or specific performance to cancel/annotate mortgage or chattel mortgage (if any) after re-computation.
Counterclaims if you were sued for collection/foreclosure—ask the court to void/reduce rates and recompute.

Venue: RTC/MTC depending on amount; if real property is mortgaged, venue rules on real actions may apply.

8.2 Administrative Complaints

SEC (lending/financing companies including OLAs): abusive collection, unlicensed operations, non-compliant disclosures.
BSP (banks/quasi-banks): unfair interest/fees or abusive practices.
NPC: privacy violations, illegal contact scraping, public shaming.
CDA: abusive cooperative lending practices.

These routes can complement (but do not replace) court action.

9) Litigation Strategy

Lead with arithmetic. Present side-by-side original vs. equitable computations, with a clean worksheet.
Invoke controlling doctrines. Emphasize that courts consistently reduce oppressive interest/penalty rates.
Target the penalty clause. Even if the interest passes, penalties often push the obligation into unconscionable territory.
Challenge compounding and hidden finance charges. Many contracts bury capitalized interest and front-loaded fees.
Document harassment. Screenshots and logs bolster regulatory complaints and support moral/exemplary damages.
Seek attorney’s fees where warranted (bad faith, need to litigate to protect rights).
Protect collateral. If there’s a mortgage or chattel mortgage, ask for injunctive relief against foreclosure pending re-computation when justified.

10) Template Allegations (Abridged)

The stipulated interest of __% per month and penalty of __% per month are excessive and unconscionable under the Civil Code and jurisprudence;

The penalty clause is iniquitous and must be equitably reduced (Arts. 1229, 2227);

Interest-on-interest and stacked charges were improperly imposed;

In the alternative, legal interest (6% p.a.) should apply in lieu of the void or reduced stipulations;

After proper re-computation and crediting of payments, the balance—if any—should be substantially lower, with costs and fees against the lender, plus damages for abusive collection.

11) Defenses You’ll Hear—and How to Respond

“Circular 905 removed all caps; we can charge anything.” Courts still police unconscionability and reduce or nullify oppressive rates and penalties.
“You agreed, you’re bound.” Consent to an unconscionable stipulation is not a shield; freedom to contract is not absolute.
“Penalties are separate from interest.” Yes—and that’s why stacked penalties on top of high interest often get reduced.
“We disclosed everything.” Opaque or misleading disclosures, or failure to show the true cost, undercut enforceability and bolster equitable reduction.

12) Practical Tips for Borrowers and Counsel

Get the contract and all statements—do not rely on text messages alone.
Compute the effective annual rate (EAR) to show the real burden.
Preserve evidence of harassment (screenshots, call logs).
File timely; actions on written contracts generally prescribe in 10 years.
Consider settlement after filing; many lenders prefer compromise once you put unconscionability and regulatory exposure on the table.
Mind venue and provisional remedies (e.g., TRO against foreclosure if warranted).
If no written interest → demand application of 6% p.a. only.
For apps → pair your court action with SEC/NPC complaints for leverage and public-interest relief.

13) Quick FAQ

Q: Can a lender legally charge 5% per month? A: There is no fixed cap, but courts have repeatedly condemned rates in that ballpark—especially with penalties and compounding—as unconscionable, and have reduced them.

Q: What if I already paid a lot of interest? A: Courts may re-compute and apply payments first to interest, then principal, and refund or credit any overpayments depending on the outcome.

Q: Do I need to be in default to sue? A: Not necessarily. You can seek declaratory relief/reformation and injunctive relief to stop abusive collections or foreclosure, coupled with a re-computation claim.

Q: Can they shame-call my contacts? A: No. That risks data privacy violations and regulatory sanctions; keep proof and complain to the NPC and the sector regulator (SEC/BSP).

14) Takeaway

No statutory cap ≠ anything goes.
Courts invalidate or pare down abusive interest and penalty clauses, frequently defaulting to 6% p.a.
Combine civil remedies (re-computation, damages, injunction) with regulatory complaints (SEC/BSP/NPC).
Your best ammunition is clean math, clean documents, and a clean narrative of how the charges became oppressive.

This article is a general overview for the Philippine setting and is not a substitute for tailored legal advice on a specific case or contract.