Introduction

In the Philippines, personal loans are a common financial tool for individuals seeking funds for various needs, such as education, medical expenses, or debt consolidation. However, the imposition of excessively high interest rates on these loans—often termed usurious—raises significant legal and ethical concerns. Usury historically refers to charging interest above legally permissible limits, but in the modern Philippine context, the landscape has shifted from strict ceilings to market-driven rates tempered by judicial oversight for unconscionability. Borrowers facing burdensome rates may seek relief through civil remedies, as criminal sanctions for usury have been largely suspended. This article exhaustively explores usurious interest rates on personal loans within the Philippine legal framework, covering historical evolution, current regulations, definitions of usury, judicial interventions, borrower protections, lender liabilities, tax implications, and practical considerations. It underscores the balance between contractual freedom and consumer safeguards, reflecting the State's commitment to equitable financial practices under the 1987 Constitution (Article XIII, Section 3 on social justice in economic relations).

Historical Evolution of Usury Laws

The regulation of interest rates in the Philippines traces back to colonial influences, with roots in Spanish and American legal traditions that viewed excessive interest as exploitative.

Act No. 2655 (Usury Law of 1916): This was the primary statute capping interest at 12% per annum for secured loans and 14% for unsecured ones. Violations were criminalized, with penalties including fines and imprisonment. It aimed to protect borrowers from predatory lending, aligning with early 20th-century economic policies.
Suspension and Deregulation: Through a series of Central Bank (now Bangko Sentral ng Pilipinas or BSP) circulars and laws, the Usury Law was effectively suspended. Presidential Decree No. 116 (1973) amended the law to allow floating rates based on Central Bank declarations. Republic Act No. 265 (Central Bank Act) and subsequent measures like Central Bank Circular No. 905 (1982) removed interest ceilings for most loans, promoting a free-market approach. This deregulation was justified by economic liberalization under the Marcos and post-EDSA administrations, allowing rates to reflect inflation, risk, and market conditions.
Current Status: While the Usury Law remains on the books, its rate caps are inoperative for personal loans not involving banks or under specific regulations. Instead, oversight focuses on transparency and fairness, with courts stepping in for abusive practices.

Supreme Court decisions have chronicled this shift. In Medel v. Court of Appeals (G.R. No. 131622, 1998), the Court noted that post-deregulation, interest rates are negotiable, but not without limits.

Legal Framework Governing Interest Rates

Personal loans fall under general contract law, with specific regulations for financial institutions.

Civil Code of the Philippines (Republic Act No. 386): Article 1306 upholds freedom of contract, provided stipulations are not contrary to law, morals, good customs, public order, or public policy. Article 1956 requires interest to be expressly stipulated in writing for validity. Article 1961 allows judicial reduction of excessive penalties or interest if iniquitous. Usurious rates can be challenged as unconscionable, voiding or reforming the contract (Article 1409).
Truth in Lending Act (Republic Act No. 3765): Mandates full disclosure of finance charges, including interest rates, fees, and effective annual rates (EAR). Non-compliance allows borrowers to recover penalties (up to PHP 100 or twice the finance charge) and voids the interest clause.
Bangko Sentral ng Pilipinas Regulations: BSP Circular No. 799 (2013) sets the benchmark for unsecured loans at 6% per annum above the BSP's policy rate, but this is indicative. For microfinance and small loans, higher rates are permitted under BSP supervision. Circular No. 1133 (2021) caps credit card interest at 2% monthly (24% annually) plus fees, but personal loans lack similar fixed caps.
Consumer Act of the Philippines (Republic Act No. 7394): Article 68 prohibits unconscionable sales acts, including excessive interest that exploits borrowers' vulnerability. The Department of Trade and Industry (DTI) enforces this for non-bank lenders.
Financial Consumer Protection Act (Republic Act No. 11765, 2022): Strengthens BSP and SEC oversight, requiring fair lending practices. It empowers consumers to challenge abusive rates through complaints to regulatory bodies.
Special Laws for Specific Lenders: For Pag-IBIG or GSIS loans, rates are statutorily low (6-10%). Pawnshops under Presidential Decree No. 114 are capped at 2.5% monthly. Informal lenders (e.g., "5-6" schemes) operate outside regulation but can be prosecuted for estafa if fraudulent (RPC Article 315).

The 1987 Constitution's Bill of Rights (Article III, Section 1 on due process) indirectly protects against usurious contracts that amount to economic duress.

Definition and Identification of Usurious Rates

Usury is no longer defined by fixed thresholds but by context-specific excessiveness.

Unconscionable Interest: Rates are usurious if "shocking to the conscience," considering factors like borrower's bargaining power, loan purpose, collateral, and market rates. Jurisprudence sets benchmarks: In Greenhills Properties v. Court of Appeals (G.R. No. 128541, 2001), 3% monthly (36% annually) was deemed excessive for a secured loan. Courts often reduce rates to 12-24% annually if above 30-50%.
Compounded vs. Simple Interest: Compounding can escalate effective rates; Article 1959 prohibits anatocism (interest on interest) without consent, except for banks.
Hidden Charges: Add-on fees (processing, notarial) can render the EAR usurious. The Truth in Lending Act requires disclosure of the total cost.
Benchmark Rates: BSP's overnight reverse repo rate (around 6% as of recent data) serves as a reference; rates exceeding 3-4 times this may be scrutinized.

In practice, personal loans from banks range from 1-2% monthly (12-24% annually), while online lenders or financing companies charge 2-5% monthly (24-60% annually), pushing boundaries.

Judicial Interventions and Remedies for Borrowers

Courts play a pivotal role in curbing usury through contract reformation.

Nullification or Reduction: Under Article 1413, usurious stipulations are void; courts can strike the interest clause, requiring only principal repayment (Chua v. Timan, G.R. No. 170452, 2008). Alternatively, reduce to reasonable levels (e.g., legal rate of 6% under BSP Circular No. 799 for judgments).
Filing a Case: Borrowers file civil actions for annulment or reformation in Regional Trial Courts (RTC), with jurisdiction based on amount (over PHP 400,000 outside Metro Manila). Prescription: 4 years for reformation (Article 1391), 10 years for written contracts.
Defenses in Collection Suits: In lender-initiated cases, borrowers counterclaim usury, potentially offsetting payments against principal.
Administrative Complaints: Report to BSP for banks (possible license suspension) or SEC for financing companies. DTI handles consumer complaints under RA 7394.
Class Actions: For widespread practices, collective suits under Rule 23 of the Rules of Court.

Notable cases: Ruiz v. Court of Appeals (G.R. No. 146418, 2003) voided 5% monthly interest as unconscionable.

Lender Liabilities and Penalties

Civil Consequences: Refund excess interest, pay damages (moral, exemplary under Civil Code Articles 2199-2235). Contracts may be rescinded.
Criminal Penalties: While Usury Law penalties are suspended, fraudulent schemes fall under estafa (RPC Article 315, up to 20 years imprisonment). Violations of RA 3765 incur fines (PHP 1,000-10,000) or jail (1-6 months).
Regulatory Sanctions: BSP imposes fines up to PHP 1,000,000 daily or revocation of authority.

Tax and Accounting Implications

Interest Income Taxation: Lenders report interest as gross income, taxed at 20% final withholding for non-residents or progressive rates for residents (TRAIN Law, RA 10963).
Deductibility for Borrowers: Business-related interest is deductible (NIRC Section 34), but personal loan interest is not.
VAT on Finance Charges: Lending services are VAT-exempt, but fees may attract 12% VAT.

Special Considerations for Vulnerable Borrowers

Indigents and OFWs: Enhanced protections under social welfare laws; legal aid via Public Attorney's Office.
Online and Fintech Loans: Regulated by SEC Memorandum Circular No. 19 (2019), capping effective rates indirectly through disclosure.
Pandemic Relief: Bayanihan Acts (RA 11469, 11494) mandated grace periods and rate moratoriums, setting precedents for crises.
International Loans: Governed by choice-of-law principles (Civil Code Article 1306), but Philippine courts apply local protections if contrary to public policy.

Practical Advice for Borrowers and Lenders

Borrowers should: Review disclosures, compare rates, seek BSP-accredited lenders, and document agreements. If facing usury, negotiate restructuring first.

Lenders must: Ensure transparency, assess borrower capacity, and avoid predatory terms to mitigate legal risks.

Conclusion

Usurious interest rates on personal loans in the Philippines, while deregulated from fixed caps, remain subject to rigorous judicial and regulatory scrutiny for unconscionability. The legal system empowers borrowers to challenge excessive rates through nullification, reduction, or damages, promoting fair lending practices. Lenders, in turn, must prioritize ethical standards to avoid liabilities. This framework aligns with national goals of financial inclusion and consumer protection, ensuring that personal loans serve as tools for empowerment rather than exploitation. Stakeholders are advised to consult legal experts for case-specific guidance, fostering a balanced credit ecosystem.