Usury Interest Limits on Private Loans in the Philippines
(A comprehensive doctrinal and practical overview as of 10 July 2025)
1. Why this topic still matters
Although the Monetary Board lifted statutory ceilings more than 40 years ago, Philippine courts continue to police “unconscionable” rates. Lenders, borrowers, and counsel therefore need to understand all the moving parts: the dormant Usury Law, Bangko Sentral ng Pilipinas (BSP) circulars, the Civil Code, special statutes, and a rapidly growing body of Supreme Court rulings that routinely strike down or cut back excessive interest.
2. Historical foundations
| Year | Instrument | Key content | Effect today |
|---|---|---|---|
| 1916 | Act No. 2655 (Usury Law) | Set maximum charges (e.g., 12 % p.a. on secured loans; 6 % simple interest absent stipulation). | Still in force but key ceilings are suspended. |
| 1946-1974 | Central Bank circulars & PD 1684 | Adjusted ceilings for post-war inflation. | Superseded. |
| 3 Dec 1981 | MB Res. 2223 & CB Circ. 905 (16 Dec 1982) | Suspended all interest-rate ceilings → effective 1 Jan 1983. Monetary Board retained power to prescribe new caps. | Remains the operative policy. |
| 1993 | RA 7653 (New Central Bank Act) | Re-created BSP; kept power to set ceilings “in extraordinary circumstances.” | No ceiling imposed to date. |
Bottom-line: There is no statutory maximum rate today, but contracts remain reviewable for “unconscionability.”
3. Civil-Code anchors
| Article | Rule |
|---|---|
| 1306 | Parties may stipulate terms so long as they are not contrary to law, morals, good customs, public order, or public policy. |
| 1956 | Interest must be in writing; otherwise, lender earns no interest at all. |
| 1959-1961 | Interest paid without valid stipulation may be recovered; courts may equitably temper charges. |
| 2209 | When indebtedness is due and demandable and the debtor incurs in delay, legal interest (now 6 % p.a.) applies if no rate is fixed. |
4. The “legal interest rate” vs. “contractual interest”
- BSP Circular 799 (21 Jun 2013) lowered the legal rate on forbearance of money from 12 % to 6 % p.a. (effective 1 Jul 2013).
- This legal rate also governs judgments (see Nacar v. Gallery Frames, G.R. 189871, 13 Aug 2013).
- Contractual rates remain free-market but are voidable if unconscionable.
5. Judicial doctrine on “unconscionable” interest
| Leading case | Stipulated rate | Court action | Guiding principles |
|---|---|---|---|
| Medel v. CA (G.R. 131622, 27 Nov 1998) | 5.5 % per month (≈ 66 % p.a.) | Reduced to 12 % p.a. simple. | Even after Circ. 905, courts may strike down “excessive” rates. |
| Spouses Abella v. People (G.R. 172223, 7 Aug 2013) | 10 % per month | Cut to 12 % p.a.; criminal usury charges dismissed. | Unconscionability is a matter of judicial notice; no need for expert evidence. |
| Macalinao v. BPI (G.R. 175490, 11 Sep 2013) | 3 % monthly interest + 3 % monthly penalty | Both rates reduced to 12 % p.a. and 6 % p.a. respectively. | Penalty and interest combined cannot defeat fairness. |
| Spouses Matanguihan v. IBank (G.R. 202537, 27 Nov 2013) | Floating rate + 3 % monthly penalty | Entire penalty void; interest trimmed to 12 % p.a. | Lenders bear burden to justify rate changes. |
| Luzon Dev’t Bank v. Enriquez (G.R. 168646, 29 Oct 2012) et al. | 35-48 % p.a. | Slashed to legal rate. | Courts apply Art. 1229 (reduction of penalty) by analogy. |
Key take-aways
No bright-line test; “unconscionability” hinges on rate size and circumstances (repeat roll-overs, adhesion, debtor’s sophistication, etc.).
Once the rate is void, principal obligation subsists; only the excessive portion is struck down.
If both interest and penalty are unconscionable, courts can:
- Reduce to legal interest (currently 6 % p.a.); or
- Fix a “reasonable” rate (often 12 % p.a. pre-2013, 6 % p.a. post-2013).
6. Statutory caps in special sectors
| Law / Reg | Scope | Current cap / rule |
|---|---|---|
| RA 9474 (Lending Company Regulation Act of 2007) & SEC IRR | “Lending companies” with ≥ P1 M capitalization. | No blanket cap, but SEC can suspend/revoke license for “unconscionable” rates or hidden charges. |
| SEC Memorandum Circular 7-2022 | Fintech / online lending apps | Total cost of credit ≤ 15 % of principal per month; no compound interest; disclosure of APR mandatory. |
| RA 3765 (Truth in Lending Act) | All “credit transactions” except banks | Lenders must disclose finance charge & APR; administrative fines for violations. |
| Pawnshops | BSP-regulated | Maximum pawnshop “service charge” = P5 + ½ % of principal per month (BSP Circ. 1143-2022). |
7. Criminal exposure
Usury as a penal offense (Art. 315 §2-a, RPC & PD 968) is largely moribund. Since ceilings are suspended, charging high interest alone is no longer criminal.
However, criminal liability may still arise from:
- Estafa (fraud) if lender conceals the true cost.
- Securities Regulation Code offenses (operating without license).
- Data-privacy and consumer-protection violations by online lenders (e.g., “contact scraping,” harassment).
8. Enforcement and remedies for borrowers
- Judicial reduction or nullification of interest/penalty in a collection suit or via a declaratory action.
- Recovery of usurious interest under Art. 1413 Civil Code (with 6 % p.a. legal interest from payment).
- Administrative complaint with SEC (for lending companies/fintech) or BSP (banks, pawnshops, quasi-banks).
- Class actions possible under Rule 65 or Consumer Act.
9. Practical drafting tips for private lenders
| Tip | Rationale |
|---|---|
| State the rate clearly in figures and words (e.g., “2 % per month, equivalent to 24 % per annum”). | Satisfies Art. 1956 & Truth-in-Lending. |
| Quote the APR, especially for short-term or add-on schemes. | Avoids claims of concealment. |
| Avoid “floating” or “at prevailing bank rate” clauses unless you explain the adjustment mechanism in writing. | Courts dislike unilateral rate-setting (Spouses Matanguihan). |
| Cap penalty interest at 1 % per month or less. | Anything higher is routinely cut down. |
| Insert a severability clause (“If any interest provision is held void…”). | Limits exposure. |
| Provide an amortization schedule upfront. | Demonstrates transparency. |
| Keep evidence of negotiation or borrower’s sophistication. | Helps rebut “adhesion” and “unconscionability.” |
10. Sample computation showcase
Scenario: Private mortgage of P500,000, 24 % p.a. interest, 3 % monthly penalty on arrears. Borrower defaults for one year.
| Item | Contractual charge | Judicial outcome (likely) |
|---|---|---|
| Interest | 24 % × P500,000 = P120,000 | Upheld if court finds rate reasonable. |
| Penalty | 3 % p.m. × P500,000 × 12 = P180,000 | Reduced to 6 % p.a. legal rate on amount due, per Macalinao. |
| Total | P300,000 | ≈ P150,000 (interest + reduced penalty). |
11. Comparative note: Banks vs. purely private loans
- Banks/Quasi-banks: Still benefit from CB Circ. 905 suspension, but they are further constrained by BSP consumer-protection standards and market competition; their typical credit-card APR ≈ 24-36 % p.a.
- Purely private lenders: Face stricter judicial scrutiny because they are not supervised on a continuing basis. Courts more readily find rates “unconscionable.”
12. Future outlook (2025-2030)
Proposed “Usury Law Modernization Bill” (various House/Senate drafts) seeks to:
- Authorize BSP to impose sector-specific caps (e.g., payday loans ≤ 36 % APR).
- Mandate full digital disclosure of total cost of credit.
BSP Digital-Bank Framework (2024) may indirectly discipline rates through competition.
AI-driven credit-scoring promises risk-based pricing—but regulators warn against algorithmic discrimination.
13. Key take-aways for practitioners
- Usury Law ceilings are suspended, not repealed. The statute still supplies the ratio that interest must be reasonable.
- Courts now treat 2-3 % per month (24-36 % p.a.) as the outer edge of reasonableness, trimming anything higher unless borrower is a sophisticated business entity with bargaining power.
- Penalty interest is scrutinized even more strictly; combining interest and penalty above 24 % p.a. is often struck down.
- Legal interest (6 % p.a.) is the fallback both for judgments and for loans with void interest clauses.
- Regulatory caps exist in specific niches (online lending, pawnshops) and may expand under pending bills.
- Transparency is the best shield: clear APR disclosure, written acceptance, and evidence of negotiation significantly reduce litigation risk.
Conclusion
Philippine usury law illustrates a unique balance: a free-market approach to interest rates tempered by active judicial guardianship. The Monetary Board’s decades-old suspension leaves parties free to contract, yet the Civil Code’s equitable principles and modern consumer statutes ensure that freedom stops short of oppression. Whether you draft, review, or litigate private loan agreements, diligence on interest clauses—and a keen eye on evolving jurisprudence and sector-specific rules—remains indispensable.
This article is for informational purposes only and does not constitute legal advice. For transactions involving significant amounts or complex circumstances, consult Philippine counsel.