Usurious Interest in Private Lending under Philippine Law
(Comprehensive doctrinal, jurisprudential, and regulatory survey—updated to 17 May 2025)
1. Concept & Historical Evolution
| Era | Governing instrument | Ceiling/Rule | Key take-away |
|---|---|---|---|
| 1916-1945 | Act No. 2655 (Usury Law) | 6 % – 14 % p.a. (varied by loan type) | Criminal penalties for any excess. (Respicio & Co.) |
| 1946-1981 | Series of amendments & CB circulars | Ceilings repeatedly raised (up to 48 % p.a. on certain classes) | Congress gradually ceded rate-setting to the Monetary Board. (RESPICIO & CO.) |
| 22 Dec 1982 | Central Bank Circular 905 | Suspended all ceilings “until further notice” | Usury Law not repealed, but its caps lay dormant. (Respicio & Co.) |
| 1998-today | Judicial policing of “unconscionable” rates | No hard cap; courts void/reduce shockingly high rates | Supreme Court becomes de-facto rate regulator. (Lawphil) |
2. Statutory & Civil-Code Foundations
Freedom to contract (Art. 1306, Civil Code) is balanced by:
- Art. 1956 – interest must be “expressly stipulated in writing.”
- Art. 1229 – courts may reduce penalties (incl. interest treated as penalty) if “iniquitous or unconscionable.”
Truth-in-Lending Act (RA 3765) and Financial Products & Services Consumer Protection Act (RA 11765) demand full cost disclosure; hidden fees are imputed to the effective interest rate.
Criminal exposure today arises not from high rates per se, but from estafa, illegal lending (RA 9474), or non-disclosure breaches. (RESPICIO & CO.)
3. Sector-Specific “Soft” Ceilings Imposed by the BSP
| Product / Sector | Present cap or benchmark | Legal basis |
|---|---|---|
| Credit cards | 3 % per month (36 % p.a.) on unpaid balance; 1 % add-on for instalments | BSP Circular 1165 (2023) (Bangko Sentral ng Pilipinas) |
| Micro-finance loans by banks/NGOs | Service charge ≤ 2.5 % per month on the declining balance (effective 30-36 % p.a.) | BSP Circular 272 (2001) (eLibrary) |
| Pawnshops | No numeric cap; mandatory disclosure of “percentage-to-maturity” & EIR | MORNBFI, Part IV |
| Online lending apps / financing companies | No cap, but SEC Memorandum 19-19 + joint BSP-SEC-NTC rules penalise “excessive fees” & abusive collection | (RESPICIO & CO.) |
Note: The Bangko Sentral defends these ceilings as macro-prudential tools, not revivals of the Usury Law.
4. Landmark Supreme Court Doctrine on “Unconscionability”
| Case (year) | Stipulated rate | Court action |
|---|---|---|
| Medel v. CA (1998) | 5.5 % per month ≈ 66 % p.a. | Declared iniquitous; reset to 12 % p.a. (Lawphil) |
| Abella v. CA (2001) | 48 % p.a. | Void; reduced to 12 % |
| Castro v. Tan (2007) | 7 % per month ≈ 84 % p.a. | Void; reduced to 12 % |
| Nacar v. Gallery Frames (2013) | — | Legal/judicial interest cut from 12 % to 6 % p.a. for money claims after 1 Jul 2013, per MB Res. 796-2013. (RESPICIO & CO.) |
| Heirs of Malate v. Gamboa (2016) | — | Clarified reckoning of 6 % legal interest. (RESPICIO & CO.) |
| Home Credit v. Spouses Alapan (20 Mar 2024) | 60 %+ p.a. consumer instalment rate | Struck down; applied Nacar matrix (12 % pre-2013, 6 % after). (RESPICIO & CO.) |
Judicial yardsticks:
- ≥ 48 % p.a. – presumptively unconscionable (especially on small, short-term consumer loans).
- 24 % – 48 % p.a. – scrutinised; lender must justify risk premium.
- Courts may also slash penalty and attorney’s-fee clauses found excessive.
5. “Legal”, “Contractual” & “Judicial” Interest – How They Interact
Contractual rate (if valid) governs until maturity or a court finds it unconscionable.
Legal interest (Art. 2209): 6 % p.a. applies when
- no written stipulation exists, or
- the agreed rate is annulled; reckoning follows Nacar (12 % before 1 Jul 2013; 6 % thereafter).
Judicial interest (damages, labor claims, quasi-delict): always 6 % p.a. from judgment until satisfaction.
6. Enforcement & Remedies
- Borrower options: demand-letter offering principal + 6 % p.a.; action for re-computation & refund of excess; raise affirmative defense of unconscionability.
- Lender precautions: written contract; clear EIR disclosure; keep total cost ≤ market norms; document risk factors (security gaps, borrower profile).
- Criminal risk: estafa for concealment/misrepresentation; RA 9474 for unlicensed lending; fines under RA 11765 for disclosure breaches. (RESPICIO & CO.)
7. Pending Legislative Moves (19ᵗʰ Congress, status 30 Apr 2025)
| Bill | Core proposal | Status |
|---|---|---|
| HB 8990 / SB 2485 – “Usury Law Restoration” | Hard cap: 3 % monthly unsecured (≈ 36 % p.a.); 2 % secured; automatic indexation every 3 yrs | Awaiting committee report (RESPICIO & CO.) |
| Anti-Predatory Lending Act | Ban compounding > monthly; fee cap 5 % of principal | House 2ⁿᵈ reading (RESPICIO & CO.) |
| National Financial Literacy Program Act | Mandatory borrower education for all consumer-credit providers | Bicameral report approved Apr 2025 (RESPICIO & CO.) |
8. Practical Check-lists
For Private Lenders
- Cap nominal rate at or below 3 % per month (benchmark courts seldom disturb).
- Provide amortisation schedule & EIR/APR calculation.
- Attach risk memo justifying any rate > 24 % p.a.
- Respect SEC/BSP Fair Debt rules (no “doxxing”, calls after 8 p.m.).
For Borrowers Contesting Excess Interest
- Collect all loan documents & payment records.
- Compute EIR; compare with BSP caps or case-law thresholds.
- Invoke Art. 1229 & Medel doctrine in a demand letter.
- Sue for re-computation plus moral/exemplary damages if harassed.
9. Key Take-aways
- No general statutory ceiling exists today—but freedom to stipulate stops where rates become “shock-the-conscience.”
- The BSP imposes selective caps (credit cards, micro-finance) and may revive Usury-Law ceilings any time via Monetary Board.
- The Supreme Court polices private loans through equitable reduction, with 48 % p.a. as the informal red line.
- Legal interest has been 6 % p.a. since 1 July 2013; older periods still use 12 %.
- Reform winds are blowing toward re-imposing hard caps; prudent lenders should model for a 24 %-36 % ceiling within the decade.
This article is for educational purposes and does not constitute legal advice. For case-specific guidance, consult Philippine counsel.