Usury in Philippine law refers to the exaction of interest on loans in excess of the maximum rate allowed by statute. For over seven decades, the country had a rigid usury regime. That regime has been dismantled, but the concept of “excessive interest” survives through judicial scrutiny, regulatory oversight, and consumer-protection statutes. Lending companies—whether traditional finance firms, online platforms, or fintech lenders—are now the primary actors in the lending market and are subject to a layered regime of disclosure, transparency, and post-contract judicial review.

Historical Framework: The Usury Law (Act No. 2655)

Enacted in 1916 and amended several times (most notably by Republic Act No. 4114 in 1964 and Presidential Decree No. 116 in 1973), Act No. 2655 fixed the following ceilings:

12% per annum – ordinary loans not secured by pledge or mortgage
14% per annum – loans secured by chattel mortgage
18% per annum – loans secured by real-estate mortgage
2.5% per month (30% per annum) – pawnshop loans
1% per month (12% per annum) – legal rate when no rate is stipulated

Violation was both a criminal offense (fine or imprisonment) and rendered the interest contract void to the extent of the excess. The law applied to all natural and juridical persons except banks and certain government institutions.

The 1982 Deregulation: Central Bank Circular No. 905

On 22 December 1982, the Monetary Board issued Circular No. 905, which “suspended” the application of the Usury Law ceilings. The circular declared that interest rates on loans and forbearance of money shall no longer be subject to any ceiling and shall instead be determined by the agreement of the parties, subject only to the general principles of the Civil Code.

Effect of the circular:

Usury ceased to be a criminal offense (no more prosecutions under Act 2655).
Parties may stipulate any rate they wish.
The legal rate of interest (when no rate is agreed) was later set by the Supreme Court at 12% per annum (Eastern Shipping Lines, 1994) until BSP Circular No. 799 (2013) reduced it to 6% per annum effective 1 July 2013.

The Supreme Court has consistently upheld the validity of Circular No. 905 (Medel v. CA, G.R. No. 131622, 2002; Trade & Investment Development Corp. v. Roblett, 2015).

Current Legal Regime: No Statutory Ceiling, But Judicial and Regulatory Limits Remain

Although there is no longer a usury law ceiling, Philippine courts and regulators still police “excessive” or “unconscionable” interest rates under the following doctrines and statutes:

Civil Code Provisions
- Art. 1306 – parties may stipulate any rate “provided it is not contrary to law, morals, good customs, public order or public policy.”
- Art. 1409 – contracts contrary to public policy are inexistent and void.
- Art. 2209 – in the absence of stipulation, the legal rate (6% p.a.) applies.
Judicial Doctrine of Unconscionability
Courts have repeatedly reduced stipulated rates when they are “iniquitous and unconscionable.” Landmark rulings:
- Medel v. CA (1998) – 5.5% per month (66% p.a.) reduced to 12% p.a.
- Rufo Quiambao v. BPI (2005) – 8% per month (96% p.a.) reduced to 12%.
- Trade & Investment Development Corp. v. Roblett (2015) – 3% per month upheld as not excessive.
- Current threshold generally accepted by the Court of Appeals: rates above 36%–48% p.a. are often reduced to 12%–24% p.a. depending on the risk profile of the loan.
Specific Regulatory Caps That Still Exist
- Pawnshops – still limited to 3% per month (36% p.a.) plus service charges (RA 386, Art. 1967 and BSP regulations).
- Financing companies (RA 8556) – no statutory cap, but BSP requires “reasonable” rates.
- Microfinance institutions and NGOs (RA 10693) – interest rates are capped indirectly through the “reasonable return” rule enforced by the Microfinance NGO Regulatory Council.
- Credit card companies – BSP Circular No. 679 (2010) and subsequent issuances impose caps on late payment charges and interest on outstanding balances (currently 3% per month plus 1% cash-advance fee).
Online Lending Platforms (Fintech / OLTIs)
Since 2019, the Bangko Sentral ng Pilipinas (BSP) has required Online Lending Platforms to obtain a Virtual Currency Exchange or E-Money Issuer license or register as a Lending Company. BSP Circular No. 1110 (2020) and Memorandum No. M-2021-010 require:
- Full disclosure of effective interest rate (EIR) using the actuarial method.
- Effective interest rate must not exceed 8% per month (96% p.a.) for small loans (under ₱100,000) in certain guidelines.
- Platforms must cap total cost of credit (interest + fees) at levels that do not exceed 200%–300% annualized for short-term loans.

Regulation of Lending Companies

Lending Company Regulation Act (Republic Act No. 9474, 2007)

All lending companies (except banks, quasi-banks, pawnshops, and financing companies) must register with the Securities and Exchange Commission (SEC).
Minimum paid-up capital: ₱1 million (Metro Manila) or ₱500,000 (outside).
Must maintain a debt-to-equity ratio of not more than 10:1.
Must disclose the “true cost of borrowing” in accordance with RA 3765 (Truth in Lending Act).

Truth in Lending Act (Republic Act No. 3765)

Requires disclosure of:
- Amount financed
- Finance charge (total interest + fees)
- Effective interest rate (annualized)
- Total payment
Failure to disclose allows the borrower to recover damages and attorney’s fees; the contract remains valid but the lender forfeits the right to collect the undisclosed charges.

Consumer Act of the Philippines (RA 7394)

Prohibits deceptive and unconscionable credit practices (Sec. 52–53).
Unconscionable conduct includes charging grossly excessive rates relative to the risk and cost of money.

Remedies Available to Borrowers

Judicial Reduction of Interest
The borrower may file an action for declaratory relief, reformation, or annulment of the interest stipulation. Courts routinely reduce rates above 36%–60% p.a. to the legal rate or a “reasonable” rate (usually 12%–24%).
Administrative Complaints
- SEC – revocation of lending company registration, fines up to ₱1 million.
- BSP – for fintech/OLTIs, suspension or revocation of license, monetary penalties.
- Department of Trade and Industry (DTI) – for consumer complaints under the Consumer Act.
Criminal Liability (Rare)
- Usury itself is no longer criminal.
- But if excessive interest is paired with threats, violence, or deceit, the acts may constitute estafa (Art. 315, RPC), extortion, or violation of RA 10175 (Cybercrime Prevention Act) for online lenders.
Debt Relief Mechanisms
- RA 11523 (Financial Institutions Strategic Transfer Act) and the COVID-19 relief laws allowed restructuring of loans with excessive interest.
- The Personal and Corporate Insolvency laws (FRIA) can discharge or restructure obligations tainted by unconscionable interest.

Practical Advice for Lending Companies and Borrowers

Lending companies should:

Always compute and disclose the Effective Interest Rate (EIR) using the formula prescribed by BSP.
Cap interest + fees at levels that survive judicial scrutiny (generally ≤ 48% p.a. for unsecured consumer loans).
Use plain-language contracts and avoid hidden charges.

Borrowers should:

Demand the full amortization schedule and EIR computation before signing.
Negotiate caps on penalties (legal maximum is 3% per month on unpaid principal).
Record all communications, especially with online lenders.
Seek SEC/BSP verification of the lender’s registration before transacting.

Conclusion

The Philippines has moved from a rigid usury regime to a market-driven interest system tempered by judicial review and sector-specific regulation. Lending companies operate without statutory interest ceilings, but they remain subject to the overriding principles of good faith, public policy, and consumer protection. Borrowers retain powerful remedies to strike down or reduce iniquitous rates, and regulators actively police disclosure and fairness. In practice, any interest rate above 36%–48% per annum on consumer or small-business loans carries a high risk of judicial reduction and regulatory sanction.