Introduction

In the Philippine legal system, the regulation of interest rates on loans has evolved significantly over the past century. Historically, the Usury Law (Act No. 2655, enacted in 1916) imposed strict ceilings on allowable interest rates to protect borrowers from exploitative lending practices. However, with economic liberalization, these ceilings were lifted, shifting the focus to contractual freedom while retaining judicial oversight against unconscionable or excessive rates. This article examines the applicability of usury principles to loans charging 10 percent weekly interest, analyzing the historical context, current legal framework, judicial interpretations, potential consequences, and related regulatory aspects within the Philippine jurisdiction.

A 10 percent weekly interest rate translates to a staggering 520 percent annual rate if compounded simply (10% × 52 weeks), or even higher with compounding. Such rates raise immediate concerns about fairness, equity, and compliance with Philippine laws governing obligations and contracts. While the formal Usury Law is no longer in force, its underlying principles persist through civil code provisions and Supreme Court jurisprudence, which deem excessively high interest rates as contrary to public policy.

Historical Background of Usury Laws in the Philippines

The Usury Law of 1916 defined usury as the contracting for or receiving interest in excess of the legal maximum. Under Section 1 of Act No. 2655, the maximum interest rate was set at 12 percent per annum for loans secured by real estate or agricultural products, and 14 percent per annum for unsecured loans or those secured by personal property. Violations could result in civil penalties, such as the forfeiture of excess interest, and in severe cases, criminal liability.

This law aimed to curb predatory lending, particularly in an agrarian economy where borrowers were vulnerable to moneylenders. Over time, amendments and related legislation, such as Republic Act No. 3765 (Truth in Lending Act), reinforced transparency requirements but maintained the interest caps.

However, in response to inflation and the need for a more flexible monetary policy, the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas or BSP) issued Circular No. 905 in 1982. This circular effectively suspended the interest rate ceilings under the Usury Law, allowing lenders and borrowers to freely stipulate interest rates. The rationale was to align with market-driven economics, but this deregulation did not eliminate all protections against abusive practices.

Current Legal Framework Governing Interest Rates

Post-1982, the primary governing laws are found in the New Civil Code of the Philippines (Republic Act No. 386, enacted in 1950). Key provisions include:

Article 1306: Parties may establish such stipulations, clauses, terms, and conditions as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. This enshrines contractual autonomy but imposes boundaries.
Article 1956: No interest shall be due unless expressly stipulated in writing. For stipulated interest, there is no fixed ceiling, but rates must not violate Article 1306.
Article 1410: Contracts that are void ab initio cannot be ratified, but stipulations on interest may be reformed or nullified separately if found excessive.
Article 2209: If the obligation consists in the payment of a sum of money, and the debtor incurs delay, the indemnity for damages shall be the payment of legal interest (currently 6 percent per annum under BSP regulations, unless otherwise stipulated).

In the absence of usury ceilings, the BSP regulates interest through monetary policy tools, such as setting benchmark rates, but does not prescribe maxima for private loans. However, the Supreme Court has filled this gap by interpreting "unconscionable" interest as violative of public policy. Rates are evaluated on a case-by-case basis, considering factors like the borrower's bargaining power, the loan's purpose, market conditions, and the lender's intent.

Additionally, Republic Act No. 9474 (Lending Company Regulation Act of 2007) requires lending companies to register with the Securities and Exchange Commission (SEC) and comply with disclosure rules under the Truth in Lending Act. Unregistered lenders, often informal "5-6" operators, face penalties, but their loans remain enforceable except for excessive interest clauses.

Applicability to 10 Percent Weekly Interest Loans

A 10 percent weekly interest rate is extraordinarily high by any standard. To assess its legality:

Calculation of Effective Interest Rate

Weekly rate: 10% on the principal.
Monthly approximation: Approximately 40-43% (depending on compounding), assuming 4-4.3 weeks per month.
Annual rate: 520% simple, or over 1,000% if compounded weekly (using the formula for effective annual rate: (1 + r/n)^(n) - 1, where r=5.2 annual nominal, n=52).

This far exceeds typical market rates for consumer loans (around 1-3% monthly for banks) or even informal lending (20-30% monthly for "5-6" schemes).

Judicial Interpretation of Unconscionable Rates

The Supreme Court has consistently held that while parties can agree on any interest rate, courts may equitably reduce or void stipulations that are "iniquitous, unconscionable, and exorbitant." Landmark cases include:

Medel v. Court of Appeals (G.R. No. 131622, 1998): A 5.5% monthly interest (66% annually) was deemed unconscionable and reduced to 1% monthly. The Court emphasized that freedom of contract does not authorize oppression.
Chua v. Timan (G.R. No. 170452, 2008): 7% monthly interest (84% annually) was struck down as excessive, with the legal rate of 12% annually (pre-2013 adjustment) applied instead.
Spoiuses Solangon v. Salazar (G.R. No. 125944, 2000): 6% monthly was voided, highlighting that rates shocking to the conscience violate morals and public policy.
Advincula v. Advincula (G.R. No. 194439, 2013): The Court noted that rates exceeding 3% monthly (36% annually) are presumptively unconscionable, absent justifying circumstances like high risk.

Applying this, a 10% weekly rate (40%+ monthly) is patently unconscionable. It would likely be declared void, with courts imposing the legal interest rate (6% per annum since BSP Circular No. 799-2013) or a reasonable rate based on equity.

Distinction from Usury

Although the Usury Law is suspended, the term "usury" is still used colloquially and in jurisprudence to describe excessive interest. However, there is no criminal penalty for usury per se. Instead:

If deceit is involved (e.g., misrepresenting the rate), it may constitute estafa under Article 315 of the Revised Penal Code.
For registered lenders, violations of RA 9474 can lead to fines up to PHP 1,000,000 or imprisonment.

Exceptions and Defenses

Certain loans may justify higher rates:

High-risk unsecured loans to borrowers with poor credit.
Short-term advances in commercial contexts.
If both parties are sophisticated (e.g., businesses), courts are less likely to intervene.

However, for typical consumer loans, especially to individuals in need, a 10% weekly rate would not withstand scrutiny. Lenders cannot defend it as "agreed upon" if the borrower was in a position of weakness.

Consequences of Imposing Unconscionable Interest

Civil Remedies: Under Article 1413 of the Civil Code, only the interest stipulation is void; the principal remains due. Excess payments may be applied to principal or refunded. Borrowers can file for reformation or annulment in Regional Trial Courts.
Forfeiture: Courts may order forfeiture of all interest, applying payments solely to principal.
Damages: Borrowers may claim moral or exemplary damages if harassment or coercion occurred.
Prescription: Actions to recover excess interest prescribe in 10 years (Article 1144, Civil Code).
Criminal Aspects: If the loan involves threats, it may fall under RA 9262 (Anti-VAWC Act) or anti-harassment laws. Unregistered lending can lead to SEC sanctions.

Regulation of Lending Practices

The BSP and SEC oversee formal lenders:

Lending companies must disclose effective interest rates under RA 3765.
Pawnshops are capped at 2.5-5% monthly under Presidential Decree No. 114.
Microfinance institutions follow BSP guidelines for reasonable rates.

Informal lenders, common in rural areas, operate in a gray zone. The Department of Trade and Industry monitors unfair practices, and local governments may regulate via ordinances.

Recent developments include BSP Circular No. 1133 (2021), enhancing consumer protection by mandating fair lending practices, and SEC Memorandum Circular No. 19 (2019), tightening registration for online lenders to combat "loan sharks."

Special Considerations in Philippine Context

In a developing economy like the Philippines, high-interest loans disproportionately affect low-income groups, exacerbating poverty. Cultural practices, such as "5-6" bombing (daily collections with 20% interest), are tolerated but increasingly challenged in courts. The COVID-19 pandemic highlighted issues with online lending apps charging up to 1% daily (365% annually), leading to SEC crackdowns.

For foreign lenders, rates must comply with Philippine laws if the loan is executed here, per the conflict of laws principles in Article 17 of the Civil Code.

Conclusion

In summary, while the Usury Law's ceilings are suspended, a 10 percent weekly interest rate on loans in the Philippines is highly likely to be deemed unconscionable and unenforceable under Civil Code provisions and Supreme Court rulings. Such rates violate public policy by exploiting borrowers, leading to potential nullification of the interest clause, application of legal rates, and possible refunds or damages. Lenders must exercise caution, ensuring rates are reasonable and transparent, while borrowers are advised to scrutinize terms and seek judicial relief if needed. This framework balances contractual freedom with equity, reflecting the Philippine commitment to social justice.