Usurious Interest Rates in Online Lending in the Philippines
A comprehensive legal‑practice primer
1. Why the Issue Matters
Digital‑only “cash‑loan” apps have exploded in the Philippines since 2016, piggy‑backing on cheap smartphones, instant e‑KYC, and an under‑banked population. While they have improved access to credit, many also charge triple‑digit effective annual rates and employ aggressive collection tactics. The tension between credit access and consumer protection has revived an old question: When is an interest rate so high that the law will strike it down as “usurious” in a jurisdiction whose formal usury ceilings were lifted four decades ago?
2. Historical Framework
| Year | Legal/Regulatory Milestone | Key Effect |
|---|---|---|
| 1916 | Act No. 2655 (Usury Law) | Caps set at 12% p.a. (secured) / 14% p.a. (unsecured). |
| 1970s | CB Circulars 416, 476, 604 | Gradual upward revisions of the ceilings. |
| May 1 1982 | CB Circular 905 | Suspended all ceilings “until otherwise prescribed.” Usury Law not repealed, but rendered dormant. |
| 1997 | RA 8556 (Lending Company Regulation Act) | SEC becomes primary regulator for non‑bank lenders. |
| 2001 | RA 8799 (Securities Regulation Code) | Expands SEC’s enforcement tools. |
| 2012 | Data Privacy Act | Regulates scraping of borrowers’ phone contacts. |
| 2016–2019 | FinTech boom; more than 60 online lenders registered. SEC issues MC 18‑19‑2019 on registration and unfair collection. | |
| Sept 2020 | BSP Circular 1098 caps credit‑card interest at 2%/month (24% p.a.). | |
| Nov 2022 | SEC Memorandum Circular 10‑2022 imposes a temporary interest‑rate cap on all lending/financing companies and their online platforms: 0.8 %/day (≈24 %/mo) ceiling on interest, 5 %/mo cap on penalties, effective 3 Jan 2023–31 Dec 2024 (renewable). |
Key takeaway: Formal usury ceilings remain suspended for most credit transactions, but sector‑specific caps now apply to credit cards and to all SEC‑licensed lending/financing companies—including online‑only apps—by virtue of BSP and SEC circulars.
3. Statutory Anchors Still Invoked by Courts
Civil Code of the Philippines
- Art. 1306 & 1355 – Autonomy of contracts tempered by public policy.
- Art. 1956 – Interest requires a written stipulation.
- Art. 1229 – Courts may equitably reduce “iniquitous or unconscionable” penalties.
- Art. 1409(1) – Contracts are void if “contrary to law, morals, or public policy.”
Act No. 2655 (Usury Law) – Still a good law; only its rate ceilings are suspended. Courts cite it for the principle that the State may intervene when pricing becomes oppressive.
Special Acts
- RA 8556 (1997) & RA 9474 (2007) – Define “lending company” and “financing company,” require SEC licensing, and empower SEC to limit rates “in the public interest.”
- RA 10870 (2016) – Credit Card Industry Regulation Law (delegates rate‑setting to BSP).
- Consumer Act (RA 7394) & Financial Products and Services Consumer Protection Act (“FCPA”, RA 11765, 2022) – Broad consumer‑protection mandates that cover abusive charges.
4. Jurisprudential Trends on “Unconscionable” Interest
| Case | Facts | Ruling on Rate |
|---|---|---|
| Spouses Abella v. CA (G.R. 164201, Aug 16 2017) | 5 % per month on a P 2 M loan | Reduced to 12 % p.a.; 5 %/mo = oppressive. |
| Castro v. Tan (G.R. 168940, Sept 1 2010) | 7 % per month on a real‑estate mortgage | Reduced to 12 % p.a. |
| Macalinao v. BDO (G.R. 175490, Sept 13 2017) | Credit‑card rate reached >36 % p.a. after compounding | Reduced to 12 % p.a.; court scolded banks for “excessive” compounding. |
| Nacar v. Gallery Frames (G.R. 189871, Aug 13 2013) | Clarified legal interest: 6 % p.a. on forbearance of money absent stipulation, effective 01 July 2013. |
Observations
- The Supreme Court routinely voids or reduces rates above ±36 % p.a. when the borrower is a natural person and the loan is unsecured or consumer‑oriented.
- Courts distinguish commercial loans to corporations (where parties are presumed sophisticated) from consumer loans.
- Even in the absence of statutory caps, Article 1229 empowers the bench to pare down “inequitable interest” motu proprio.
5. SEC and BSP Administrative Controls Over Online Lenders
| Instrument | Coverage | Core Provisions |
|---|---|---|
| SEC MC 18‑2019 | All lending/financing companies using online platforms | Platform registration, mandate to disclose total cost of credit (TCC). |
| SEC MC 19‑2019 | Same | Prohibits harassment, public shaming, contact‑scraping beyond references. |
| SEC MC 10‑2022 | Lending/financing companies and their online apps | Rate ceiling: 0.8 %/day on principal; Penalty cap: 5 %/month; applies to loans ≤ P 10,000 and ≤ 4 months tenor. |
| BSP Circular 1098 (2020) | Banks and credit‑card issuers | Rate cap: 2 %/mo (24 % p.a.); Late‑payment fee: P 200 or 1 % of outstanding, whichever is lower. |
Practical note: Unregistered or unlicensed online‑only “cash‑loan” apps fall outside these circulars but not outside the FCPA, the Cybercrime Prevention Act (re. doxxing), or criminal statutes against harassment.
6. Civil, Administrative, and Criminal Exposure of Online Lenders
Civil Liability
- Reduction or nullity of interest; borrower pays only principal plus legal interest (6 % p.a.) from demand.
- Damages for “moral shock” caused by public shaming or data‑privacy violations.
Administrative Penalties (SEC or BSP)
- Suspension or revocation of license; P 10k–1 M fines per infraction.
- Permanent black‑listing of directors/officers.
Criminal Exposure
- Data Privacy Act (imprisonment up to 6 y) for unlawful processing of contact lists.
- FCPA (2022) creates criminal penalties for fraudulent mis‑selling.
- Cyber‑libel and grave threats under the Revised Penal Code.
7. Borrower Remedies & Enforcement Pathways
| Forum | Typical Relief | How to Trigger |
|---|---|---|
| SEC Enforcement & Investor Protection Department | Cease‑and‑desist orders (CDO), fines, cancellation of Certificate of Authority | File complaint form + evidence (screenshots, contracts). |
| National Privacy Commission | Order to stop contact‑harvest; administrative fines | Lodge privacy complaint online. |
| Regular courts (civil) | Annul or re‑compute loan; damages | Small‑Claims (< P 1 M) or RTC; cite Art. 1229. |
| Barangay/Police | Harassment, unjust vexation | Sworn complaint, request inquest if threats. |
8. Compliance Checklist for Legitimate Online‑Lending Operators
- Licensing – SEC Certificate of Authority + separate registration of any mobile app.
- Interest‑rate Policy – Align with SEC MC 10‑2022 (or successor issuances). Publish annual percentage rate (APR) prominently.
- Data‑Privacy Impact Assessment (DPIA) – Limit permissions to camera, storage, and only 1–2 verifiable contact references.
- Collection Manual – Ban calls after 6 PM, no social‑media tagging, no threats.
- Complaints Desk – 24‑hour response window mandated by FCPA IRR.
- Disclosure – Provide sample loan computation, cooling‑off period, and clear amortization schedule.
9. Policy Debates & Emerging Trends (2025 Outlook)
- Sunset Review of MC 10‑2022 – SEC signals intention to extend the rate caps through 2026, possibly lowering the 0.8 %/day ceiling to 0.5 %/day.
- Open Finance Framework – BSP’s phased implementation may channel borrowers toward account‑aggregation‑based credit scoring, reducing “risk premium” excuses for high rates.
- Congressional Bills – Several House bills (e.g., HB 2601) seek to re‑codify a modern Usury Act that differentiates consumer from commercial lending.
- AI‑driven loan underwriting – Raises fairness and transparency concerns under FCPA and the Equality Opportunity Credit Act draft.
10. Conclusion
Philippine jurisprudence makes clear that even without a rigid statutory usury ceiling, interest that shocks the conscience will be curtailed. Recent sector‑specific regulations now affirmatively set caps for online‑lending companies, reflecting a policy pivot toward stronger consumer protection.
For practitioners: Always review both the written rate stipulation and the total effective cost, verify SEC/BSP circular coverage, and be prepared to invoke Article 1229 if rates creep beyond roughly 36 % p.a. Conversely, lenders who keep within the SEC’s temporary caps, practice ethical collection, and adopt privacy‑by‑design stand on solid legal ground in 2025 and beyond.
This article is for informational purposes only and does not constitute legal advice. For specific situations, consult counsel or the relevant Philippine regulatory agencies.