Usurious Interest Rates in Cash Lending in the Philippines

(A doctrinal and practical guide for lenders, borrowers, and counsel)

I. Executive summary

There is no statutory interest-rate ceiling in the Philippines today. The Usury Law (Act No. 2655) technically still exists, but its interest ceilings have been suspended since 1982 by Central Bank (now BSP) Circular No. 905.
High rates can still be struck down. Even without a statutory cap, the courts may annul or reduce interest if it is unconscionable, iniquitous, or contrary to public policy under the Civil Code and long-standing Supreme Court jurisprudence.
Interest must be in writing. Under Civil Code Art. 1956, no interest is due unless expressly stipulated in writing.
If a rate is voided or reduced, courts usually substitute the “legal interest” (now 6% per annum following Nacar v. Gallery Frames), with nuanced rules on when it starts to run and whether it is compensatory (for loans/forbearance) or moratory (for delay).
Regulatory regimes still bite. Lending and financing companies (SEC jurisdiction), banks and pawnshops (BSP jurisdiction), and consumer credit disclosures (Truth in Lending Act) all impose compliance, disclosure, and collection-conduct duties, with sanctions for violations—separate from the unconscionability doctrine.

II. The legal architecture

1) Usury Law vs. Circular No. 905

Usury Law (Act No. 2655, as amended) once imposed ceilings for interest and other charges.
Central Bank Circular No. 905 (1982) suspended these ceilings, effectively deregulating interest rates. The statute was not repealed; only the maximum rates (and related criminal usury provisions tied to ceilings) were rendered inoperative.

2) Civil Code anchors

Freedom to stipulate: Parties may fix an interest rate (Art. 1306), subject to law, morals, good customs, public order, or public policy.
Writing requirement: “No interest shall be due unless it has been expressly stipulated in writing.” (Art. 1956).
Penalty reduction: Courts may reduce penalties if iniquitous or unconscionable (Art. 1229), a tool often applied to penalty interest, liquidated damages, or default charges.
Public policy limits: Clauses enabling compound interest without clarity, stacked penalties, or one-sided escalation can be tempered or struck.

3) Jurisprudential rule-of-reason

With no statutory cap, the Supreme Court polices interest via a reasonableness/unconscionability test. A high nominal rate, short-term compounding, layered penalties, and debtor vulnerability weigh against enforcement. Representative holdings (spanning decades) have:

Struck down 3%–7% per month (36%–84% p.a.) and similar “shocking” rates as unconscionable;
Reduced the agreed rate to legal interest instead; and
Nullified oppressive penalty or default charges, especially when combined with high regular interest.

(Exact permissible thresholds are not fixed; courts look at totality: rate, circumstances, bargaining power, transparency, and stacking of charges.)

4) Legal interest: from Eastern Shipping to Nacar

Before July 1, 2013: For loans/forbearance, legal interest was 12% p.a. (per Eastern Shipping Lines).
From July 1, 2013 onward: 6% p.a. legal interest applies (per Nacar v. Gallery Frames, aligning with BSP policy guidance).
Accrual depends on context**:**
- For loan/forbearance without default: from judicial or extrajudicial demand, or as stipulated;
- For damages: from finality or demand, per the particular ruling and claim type.

III. What counts as “usurious” today?

“Usurious” in strict statutory sense is largely moot (no ceilings). In practice, courts examine unconscionability, focusing on:

Effective cost of credit
- Not just the nominal rate, but the effective interest rate (EIR) considering add-on pricing, service fees, rebates, advance interest, processing fees, collection fees, and mandatory insurance.
- Short tenors with add-on computation can yield EIRs far higher than the stated rate.
Stacked charges
- Regular interest + penalty interest + liquidated damages + late fees + collection fees + attorney’s fees. When combined, these may shock the conscience and prompt judicial reduction.
Compounding & capitalization
- Interest-on-interest requires express stipulation and must be reasonable. Automatic capitalization for missed interest payments is closely scrutinized.
Debtor vulnerability and bargaining
- Salary loans, “sangla-ATM,” emergency small loans, agricultural advances, or micro-entrepreneur credit made under pressing need or adhesion raise red flags.
Transparency
- Opaque disclosures, misleading computations, or hidden fees undermine enforceability; the Truth in Lending Act (RA 3765) and its rules require clear disclosure of finance charge and EIR.

IV. Statutory and regulatory compliance landscape

1) Truth in Lending Act (RA 3765)

Mandates clear disclosure before consummation: finance charge, total amount to be financed, EIR/annualized cost, and payment schedule.
Non-compliance may trigger administrative sanctions and civil liability; it does not automatically void the loan but strengthens a debtor’s case for relief.

2) Lending & Financing Companies (SEC)

RA 9474 (Lending Company Regulation Act) and RA 8556 (Financing Company Act) require registration and compliance.
SEC issuances prohibit unfair debt collection practices (e.g., harassment, shaming, threats), require proper advertising and clear disclosure, and regulate online lending platforms.
Violations risk fines, suspension/revocation, and criminal referral (for fraud, data privacy breaches, etc.).

3) Banks, quasi-banks, pawnshops (BSP)

BSP oversees prudential standards and consumer protection for supervised entities. Pawnshops and certain credit products have special rules on disclosures, fees, and practices (separate from rate caps).
Credit cards have policy caps (distinct from cash lending) that demonstrate the State’s consumer-protection stance even in a deregulated rate environment.

4) Data Privacy and harassment

Using a borrower’s contacts/photos to coerce payment can violate the Data Privacy Act and SEC/BSP consumer-protection rules. Such conduct supports damages, injunctions, and regulatory penalties.

V. Contract design: enforceable interest, avoidable pitfalls

A. For lenders

Put interest “in writing,” plainly (Art. 1956). Avoid legalese; state nominal rate, compounding method, periodicity, and EIR.
Be transparent on all costs: list fees (processing, documentation, disbursement), insurance, rebates/discounts, and net proceeds.
Moderate penalties: cap penalty interest (e.g., single-digit % per month) and don’t double-charge alongside heavy late fees. Provide a cure period.
Limit compounding: If capitalizing unpaid interest, state conditions and timing; consider simple interest by default.
Escalation clauses: Tie adjustments to objective benchmarks (e.g., policy rate, reference rate) and disclose triggers; avoid unilateral, discretionary changes.
Attorney’s fees & liquidated damages: Keep reasonable (e.g., a modest percentage or proven costs). Excessive stipulations invite judicial pruning.
Collections: Train staff and partners to avoid harassment and privacy violations. Retain call recordings / notices as compliance evidence.

B. For borrowers

Check the paperwork: If no written interest exists, the lender cannot collect contractual interest (though legal interest may run for forbearance).
Compute the true cost: Ask for the EIR and amortization schedule. Watch for advance deductions that inflate the effective rate.
Challenge unconscionability: Document income, need, bargaining context, and pressure. Courts look beyond the paper rate.
Keep records: Receipts, bank slips, chat logs, and call records matter for partial payments, demands, and harassing acts.
Regulatory remedies: For abusive conduct or undisclosed charges, consider SEC/BSP complaints, NPC (privacy), or DOJ/PNP if threats or fraud are involved.

VI. Litigation playbook

Typical claims and defenses

For lenders:
- Sum of money for unpaid principal, contractual interest, penalties, and fees;
- Foreclosure if secured; replevin for chattel mortgages;
- Attorney’s fees and costs.
For borrowers:
- Unconscionability (reduce or nullify interest/penalties);
- Non-compliance with Art. 1956 (no written stipulation);
- Truth in Lending violations (damages; credibility issues);
- Excessive compounding or double-charging;
- Illegal collection practices (damages, exemplary damages).

Judicial outcomes to expect

Interest trimmed to legal interest (6% p.a.) from demand or filing, depending on facts.
Penalty interest reduced or deleted if overlapping with high regular interest.
Attorney’s fees reduced to a reasonable figure (often 10% or the proved amount).
Interest running until full satisfaction, with separate reckoning pre-judgment and post-judgment.

VII. Practical computations (worked examples)

Disclaimer: Illustrative only; actual court figures depend on pleadings, proof, and judicial findings.

Example 1: Written interest, high rate pared down

Facts: ₱100,000 loan; 5%/month stated interest; no penalty; borrower defaults after 6 months; lender sues after 10 months.
Likely result: Court may void the 5%/month as unconscionable and apply legal interest (6% p.a.) instead, counted from extrajudicial demand (or filing) to full payment.
Computation idea:
- Principal: ₱100,000
- Interest: ₱100,000 × 6% × (no. of years from demand/filing to satisfaction)
- No separate penalty (none stipulated)

Example 2: Stacked charges pruned

Facts: ₱50,000 salary loan; 3%/month interest + 3%/month penalty on default; ₱2,000 “processing fee” deducted upfront; default at month 3; suit filed month 12.
Potential ruling:
- 3%/month may be reduced to legal interest;
- Penalty likely pruned (double-charging);
- Upfront fee scrutinized for truth-in-lending and EIR;
- Net proceeds (₱48,000) may inform effective-rate analysis.

Example 3: No written interest clause

Facts: Verbal loan ₱200,000; lender claims “we agreed on 4%/month.”
Civil Code Art. 1956 bars recovery of contractual interest. Lender may get principal, plus legal interest (6% p.a.) as forbearance from demand.

VIII. Special contexts

1) Microfinance and informal lending

Courts are alert to necessitous circumstances (medical emergencies, subsistence needs). High-frequency compounding, sangla-ATM, and roll-over fees receive strict scrutiny.

2) Pawn transactions

Pawnshops (BSP-supervised) have distinct rules on charges and disclosures; pledgors should examine tickets for interest, service charges, and redemption terms. Courts disfavor forfeiture windfalls and opaque fees.

3) Secured lending (real/chattel)

Even with collateral, oppressive rates and penalties can be scaled down. In chattel mortgages, replevin can speed recovery of security, but deficiency claims face the same interest scrutiny.

IX. Compliance and risk checklist

For lenders

Corporate authority and registration (SEC/BSP as applicable).
Clear, written interest clause; simple interest unless compounding is justified and explicit.
EIR and full fee disclosure, delivered before consummation.
Reasonable penalties; avoid double-charging.
Amortization schedule provided; computations align with disclosure.
Data privacy safeguards; no harassment in collections.
Document demands, reminders, and restructuring offers.

For borrowers

Ask for EIR and net proceeds (after any deductions).
Keep copies of contracts, tickets, receipts, and messages.
Watch for compounding and layered fees.
If pressured or harassed, document and report (SEC/BSP/NPC) and consider legal action.
If sued, raise unconscionability, lack of written interest, and Truth in Lending issues.

X. Frequently asked questions

Q1: Is charging 5% per month automatically illegal? No statutory cap exists, but courts have often found 3%–7% per month unconscionable in context and reduced them to legal interest.

Q2: Can a lender charge interest if it’s not in writing? No. Under Art. 1956, interest must be in writing. Otherwise, only legal interest for forbearance may apply from demand.

Q3: Can a lender charge interest on unpaid interest? Only if expressly stipulated. Even then, courts scrutinize compounding and may disallow or limit it if oppressive.

Q4: Are penalty interest and late fees both allowed? Yes, but stacking them at high levels risks judicial reduction under Art. 1229.

Q5: If a rate is voided as unconscionable, what happens? Courts typically substitute legal interest (6% p.a.) from the proper accrual date, and may delete or cut down penalties.

XI. Strategic takeaways

Contract clarity and moderation are the best defenses for lenders.
Documentation and transparency are the best shields for borrowers.
Courts are pragmatic: they preserve legitimate credit pricing but reject oppression.
Regulators prioritize consumer protection and fair collection even without a statutory cap.

XII. Model clauses (illustrative)

Interest Clause (Simple Interest): “The Loan shall bear simple interest at __% per annum, computed on a 365-day year on the outstanding principal, payable monthly in arrears on each Due Date.”

Default Interest (Capped & Clear): “If Borrower is in delay, the overdue amount shall bear default interest at __% per month (capped at __% per annum), non-compounded, from the day after the Due Date until actual payment. Default interest shall not apply in addition to Late Fees for the same period.”

Late Fee (Alternative to Default Interest): “A flat late fee of ₱___ applies per missed installment, subject to a maximum of ₱___ per month, in lieu of default interest.”

No Interest-on-Interest (or Limited Capitalization): “Unpaid interest shall not earn interest. Any capitalization of interest requires written agreement at restructuring and shall be simple (non-compounded) thereafter.”

Disclosure Acknowledgment: “Borrower acknowledges receipt before consummation of the Truth-in-Lending Disclosure Statement, including finance charge, total of payments, effective interest rate, fees, and amortization schedule.”

Attorney’s Fees (Reasonable): “In case of suit to enforce this Loan, Borrower shall pay attorney’s fees not exceeding 10% of the amount adjudged or ₱___, whichever is lower, plus proven costs of suit.”

Collection Conduct: “Lender shall comply with applicable consumer protection and data privacy rules and shall not employ harassment, threats, or shaming in collections.”

XIII. Final note

While no hard cap exists, Philippine law—through the Civil Code, Truth in Lending, regulatory rules, and Supreme Court doctrine—disciplines abusive lending. Parties who price fairly, disclose fully, and collect lawfully are most likely to see their agreements respected and enforced.