Usurious Interest Rates and Overdue Penalties in Online Loans (Philippine Context)

1) Big picture

In the Philippines, there is no fixed statutory cap on interest rates for most private loans, including app-based/online loans. This is because Central Bank (now BSP) Circular No. 905 (1982) effectively removed the ceilings under the Usury Law (Act No. 2655). But courts and regulators still police “unconscionable” rates, junk fees, and abusive collection. In short: deregulated does not mean “anything goes.”

Borrowers can ask courts to void or reduce excessive interest and penalties. Lenders must also follow licensing and conduct rules (SEC/BSP), privacy rules (NPC), and consumer protection norms.

2) Governing legal framework (who regulates what)

Civil Code
- Freedom to stipulate interest (Arts. 1306, 1956), but terms that are contrary to law, morals, good customs, or public policy are voidable/void.
- No interest unless expressly stipulated in writing (Art. 1956).
- Interest does not earn interest unless expressly stipulated, and even then subject to limits (Arts. 1959, 2212).
- Penalty clauses (late fees, penalty interest) may be reduced if iniquitous or unconscionable (Arts. 1229, 2227).
Usury Law (Act No. 2655)
- Still on the books, but rate ceilings suspended by CB Circ. 905 (1982). Thus, no numeric cap by statute for most loans. The effect is deregulation, not a free pass.
Bangko Sentral ng Pilipinas (BSP)
- Regulates banks and their credit products (including many digital lenders operating as banks or bank partners).
- Issues product-specific caps/guards where applicable (e.g., certain retail credit products from time to time) and enforces consumer protection and fair collection standards.
Securities and Exchange Commission (SEC)
- Regulates lending companies (RA 9474) and financing companies (RA 8556), including online lending platforms (OLPs).
- Requires registration and authority to operate; polices unfair debt collection and deceptive disclosures; can fine, suspend, or revoke licenses and order app takedowns.
National Privacy Commission (NPC) & Data Privacy Act (RA 10173)
- Prohibits unlawful data collection/processing and shaming/“contact harvesting” (accessing phone contacts, blasting messages to employers/family) without proper lawful basis and consent. Criminal and administrative penalties apply.
Other cross-cutting norms
- Consumer Act, Cybercrime Prevention Act, and criminal statutes may be triggered by threats, defamation, or coercion in collections.

3) How Philippine courts treat high interest and penalties

Even with deregulation, the Supreme Court repeatedly strikes down or trims excessive rates and penalties:

Medel v. Court of Appeals (G.R. No. 131622, 27 Nov 1998): 5.5% per month (≈66% p.a.) declared unconscionable; reduced by the Court.
Neri v. Heirs of Hadji Yusop (G.R. No. 138631, 14 Oct 2005): 3% per month reduced as iniquitous.
Castro v. Tan (G.R. No. 168940, 17 Jun 2015): reiterated that courts may intervene to cut down unconscionable interest/penalties despite deregulation.

Key takeaways from jurisprudence:

Courts look at the effective burden, not labels: nominal rate, penalty interest, late charges, “processing fees,” “service fees,” and roll-over charges are viewed together.
If the combined charges are grossly disproportionate to risk, lack clear disclosure, or are designed to trap the borrower (e.g., very short tenor + high roll-over fees), they can be struck down or reduced.
Penalty interest and late fees are particularly vulnerable to reduction under Arts. 1229/2227 when they are punitive rather than compensatory.

4) Interest, penalty, compounding, and “legal interest”

Contractual interest: Must be express and in writing (Art. 1956).
Penalty interest/late fees: Enforceable in principle, but reducible if unconscionable (Arts. 1229, 2227).
Compounding (“interest on interest”): Not allowed unless expressly stipulated (Art. 1959), and courts still scrutinize unconscionability.
Default/legal interest (absent valid stipulation): The Supreme Court (e.g., Nacar v. Gallery Frames, 2013) pegs legal interest at 6% per annum for loans/forbearance and judgments, applied from the proper reckoning point (e.g., from demand, filing, or judgment—fact-dependent).

5) Online lenders: special compliance concerns

Licensing & disclosures (SEC/BSP)
- Operate only if registered and authorized.
- Provide clear, prominent disclosures of APR/effective rate, all fees, tenor, roll-over policy, repayment calendar, and collection methods.
- Use only approved online lending platforms and keep registration current.
Fair collection
- No threats, profanity, or shaming; no public disclosure of debt; no harassing calls to employers/family; contact only the borrower (or lawful guarantor) via agreed channels and reasonable hours.
- Keep records of attempts, scripts, and training. Third-party collectors must be properly contracted and supervised.
Data privacy
- Minimize data; collect only what is necessary; obtain informed, specific, freely-given consent.
- No blanket access to phone contacts/photos/SMS; no mass messages to contacts; ensure privacy notices are clear; honor data subject rights (access, deletion, correction).
- Implement security measures and breach response protocols.
Marketing
- No misleading ads such as “0% interest” if fees create a positive APR. Use sample amortizations that reflect all charges.

6) What counts as “usurious” today?

Because there’s no statutory cap, “usury” in modern Philippine practice is a court-made determination anchored on unconscionability. Indicators include:

Very high nominal rates (e.g., multi-percent per month) particularly for small-amount, short-tenor loans where roll-overs are common.
Stacked fees (processing, service, convenience, disbursement, collection, SMS, platform, etc.) that inflate the true APR.
Punitive late fees/penalty interest that snowball quickly, especially if combined with compounding or daily penalty accrual.
Asymmetric contracts: one-sided clauses, vague disclosures, or adhesion contracts targeted at vulnerable consumers.
Abusive collection and privacy violations—even if the rate were “okay,” misconduct can itself justify sanctions and damages.

7) Practical borrower remedies

Negotiate: Ask the lender to waive/reduce penalty interest and junk fees, or to restructure.
Document everything: Screenshots of app screens, disclosures, payment receipts, call recordings (where lawful), messages.
Regulatory reports:
- SEC for unregistered lending, unfair collection, deceptive disclosures (lending/financing companies).
- BSP for banks and their digital channels/products.
- NPC for privacy abuses (contact blasting, unauthorized access to contacts/media).
File suit in trial courts to void or reduce unconscionable interest/penalty; seek damages for abusive collection and attorney’s fees when warranted.
Defenses in collection cases: Raise unconscionability, lack of written stipulation, excessive penalty, invalid compounding, payment/receipts, and lack of privity if harassed non-borrowers complain.

8) Compliance checklist for online lenders (Philippine-focused)

Corporate & licensing
- SEC registration (lending/financing company) and specific authority to operate.
- OLP registration/approval where required; app store listings consistent with approvals.
- Contracts, KYC, and AMLA controls if applicable via partnerships with covered persons.
Contracting & disclosures
- APR-based pricing, with plain-language summaries and sample amortization tables.
- Prominent display of late fee and penalty interest formulae; clear grace periods and cut-off times.
- No default compounding; if allowed, say how and when (e.g., monthly, post-maturity only), and cap it.
Pricing governance
- Internal “reasonableness” thresholds (e.g., guardrails on monthly rate + fees + penalties).
- Hard caps on aggregate penalty accruals (e.g., stop penalties once unpaid charges hit a multiple of principal).
- Rollover controls to prevent debt traps (limit consecutive extensions; require partial amortization).
Collections
- Scripts vetted for fair-collection compliance; attempts logged; no third-party contact without lawful basis.
- Quiet hours policies; escalation/complaints workflows; periodic audits and training.
Privacy & security
- Minimize permissions in the mobile app; no contact scraping; encryption in transit/at rest.
- Separate marketing from servicing consents; easy opt-out and data deletion channels.
- Vendor DPAs with collectors/analytics providers; breach drills and notification playbooks.

9) Drafting tips: interest & penalty clauses (borrower-protective and court-resilient)

Spell out the rate (per annum), how it accrues, and when it changes.
Disclose APR that includes all mandatory fees; avoid “teaser” lines that ignore required charges.
Late fee: fixed, reasonable, once per missed cycle (avoid per-day snowballing unless modest and capped).
Penalty interest: if any, make it modest, non-compounding, and time-bounded; expressly cap total penalties (e.g., cannot exceed X% of principal).
No compounding unless borrower has clear, informed agreement; even then, space it out (e.g., monthly) and cap it.
Grace period: provide a short grace before penalties trigger.
Transparency: give a Key Facts Statement (one-pager) and in-app calculator that shows total cost.

10) Worked examples (how courts “see” effective rates)

Short-tenor cash loan
- Principal: ₱5,000; Tenor: 14 days
- Stated rate: 4% (for 14 days) → looks small
- Fees: “processing ₱300” + “platform ₱200” deducted upfront
- Effective cost: Borrower receives ₱4,500 but owes ₱5,200 in 14 days → ₱700/₱4,500 = 15.56% for 14 days → rough APR well over 300% p.a. Courts/SEC will focus on this effective burden, not the 4% label.
Penalty stacking
- Monthly rate: 3%; Penalty interest: 1% per day after due date + ₱500 “late fee,” compounding daily.
- This is a classic red flag: daily penalty + compounding can be clawed back by courts as punitive; regulators may deem it unfair.

11) Frequently asked questions

Q: Are sky-high rates “legal” since the Usury Law was suspended? A: Not automatically. Courts can invalidate or cut unconscionable interest and penalties, award damages, and regulators can sanction lenders for unfair or deceptive practices.

Q: Can a lender message my boss or family if I’m late? A: Generally no; that is an unfair collection practice and likely a privacy violation unless there’s a lawful basis (e.g., co-borrower/guarantor) and proper consent.

Q: If my contract is silent on interest, do I still owe interest? A: Contractual interest requires a written stipulation. Absent that, legal interest (6% p.a.) may apply as damages/forbearance from the proper reckoning date per jurisprudence.

Q: Can lenders compound interest automatically? A: No, not unless expressly agreed, and courts still police for unconscionability.

12) Practical playbooks

For borrowers

Ask for a Key Facts Statement.
Compute the APR including all fees and any roll-over costs.
If harassed: keep evidence and complain to SEC/BSP/NPC as appropriate; consider legal counsel for court relief to reduce charges.

For lenders

Price for risk, not punishment; document your risk-based pricing rationale.
Build caps on penalties and stop-accrual rules.
Ensure data minimization and no contact scraping; audit third-party collectors.
Maintain clear consent logs and easy dispute channels.

13) Bottom line

Philippine law deregulates nominal rates but empowers courts and regulators to curb unconscionable interest and punitive overdue penalties—especially acute in online micro-loans. Lenders who are transparent, proportionate, and privacy-compliant are on solid ground; those who rely on hidden fees, compounding penalties, and harassment face voided terms, damages, and regulatory sanctions.