Usury Law, Personal-Loan Interest, and Related Regulation in the Philippines
A comprehensive legal primer for lenders, borrowers, and counsel
1. Historical backdrop: Act No. 2655 (Usury Law) of 1916
| Year | Key instrument | Salient points |
|---|---|---|
| 1916 | Act No. 2655 | • Fixed ceilings at 6 % p.a. (loans with real-estate security) and 12 % p.a. (all other loans). • Authorized the Monetary Board (then the “Governor-General”; now the Bangko Sentral ng Pilipinas or BSP) to raise, lower, suspend, or re-impose ceilings when economic conditions warrant (sec. 1-a, added in 1946). |
| 1973-1981 | PD 116, CB Circular 454, PD 1684, CB Circular 727, etc. | Raised ceilings several times (up to 48 % p.a. on certain categories); reduced the Usury Law’s practical relevance but never repealed it. |
| 22 Dec 1982 | Central Bank Circular 905 | “Suspended” all interest-rate ceilings under the Usury Law until further orders. From that date, the statute has remained dormant but alive: it can spring back if the Monetary Board issues a new ceiling. |
2. Does usury still exist? — Yes, but only in concept.
Circular 905 did not repeal the Usury Law; it only removed the numeric caps. The statute—including its penal provisions—persists in the background. If the Monetary Board re-imposes a ceiling (it never has, since 1982), charging more than that ceiling would again be criminal usury.
3. Contemporary rule: Freedom to stipulate, tempered by “unconscionability”
- Civil Code art. 1956 – No interest is due unless expressly stipulated in writing.
- Civil Code art. 1306 – Parties may establish stipulations “not contrary to law, morals, good customs,” etc.
- Civil Code art. 1229 / art. 1175 – Courts may reduce penal clauses or interest that is “iniquitous or unconscionable.”
Hence, after 1982 any interest rate is theoretically permissible, but courts will strike down or reduce rates they deem grossly excessive.
Leading cases
- Medel v. Court of Appeals, G.R. 131622 (23 Nov 1999) – 5.5 % per month (≈ 66 % p.a.) declared unconscionable; reduced to 12 % p.a.
- Spouses Abella v. Spouses Francisco, G.R. 169379 (27 Jan 2009) – 6 % per month declared void; interest lowered to 12 % p.a.
- Castro v. Tan, G.R. 168940 (15 Feb 2008) – 7 % per month reduced to 12 % p.a.
- Nacar v. Gallery Frames, G.R. 189871 (13 Aug 2013) – Standardized legal interest at 6 % p.a. (both on loans and judgment awards) following BSP Monetary Board Circular 799 (21 June 2013).
4. Sector-specific caps that do exist
While Circular 905 removed general ceilings, regulators have since imposed targeted caps for specific products in the name of consumer protection:
| Instrument | Year & issuer | Scope | Ceiling |
|---|---|---|---|
| BSP Circular 1113 (28 Sep 2021, amended 14 Mar 2024) | Credit-card receivables | All banks and credit-card issuers | 24 % p.a. (2 % per month) finance charge on unpaid balances; 1 % per month on installment loans; ₱200 cap on late-payment fee. |
| SEC Memorandum Circular 3-2022 (effective 8 Mar 2022) | Small personal loans (≤ ₱10,000, tenor ≤ 4 months) extended by lending or financing companies (not banks/co-ops) | 6 % per month (≈ 0.20 % per day) interest inclusive of service fees; separate non-interest charges capped at 5 % of principal. | |
| BSP Circular 1133 (2022) | Motorcycle installment loans under Motorcycle-loan Program | 35 % add-on rate cap (≈ 1.46 % declining balance). |
Violating these caps does not constitute “usury” (because Circular 905 still stands); instead, it triggers administrative penalties (fines, suspension, license revocation) under the BSP Charter or the Lending Company Regulation Act.
5. Key statutes and regulations impacting personal-loan interest
| Law / issuance | Primary regulator | Relevance |
|---|---|---|
| R.A. 9474 (Lending Company Regulation Act of 2007) & SEC MC 19-2019 (online-lending moratorium) | SEC | Requires non-bank personal-loan providers to register, maintain minimum capital, and comply with disclosure & collection-practice rules. |
| R.A. 8556 (Financing Company Act of 1998, as amended by R.A. 10881) | SEC | Covers installment-financing and consumer finance. |
| R.A. 3765 (Truth in Lending Act) & BSP Circular 730 (2001) | BSP/SEC | Lender must disclose Total Effective Interest Rate (EIR), all charges, amortization schedule, and consequences of default before consummation. |
| R.A. 7394 (Consumer Act) & DTI DAO 2-93 | DTI | Prohibits misleading interest disclosures in advertising. |
| Data Privacy Act of 2012 & NPC Circular 16-01 | NPC | Limits access to borrower phone/contact lists; consent must be specific, freely given. |
| BSP Circular 1165 (2023) – Consumer Protection | BSP | Mandates suitability assessment, fair treatment, and internal dispute mechanism for all consumer-credit products. |
6. Judicial calibration of interest after default
When a loan contract is silent on default interest, or when the stipulated default rate is void, courts award:
- 6 % p.a. from date of judicial or extrajudicial demand until full payment (Nacar formula).
- For loan or forbearance of money, the principal continues to earn the contract rate until default; afterward the court may impose 6 % p.a. or another reasonable rate.
7. Penalty interest vs. liquidated damages
Courts treat an excessive “penalty interest” the same way they treat exorbitant regular interest: they may reduce or strike it altogether (Civil Code art. 1229). Often they retain 6 % p.a. in lieu of the void rate.
8. Criminal liability
Usury under Act 2655 remains a misdemeanor only if a ceiling is in force. Because no general ceiling exists today, criminal usury prosecutions have disappeared since the 1980s. Lending-related criminal cases now arise from:
- Estafa (Art. 315, RPC) – e.g., falsified documents, deceitful schemes.
- RA 9474 – Operating a lending business without a license (fine up to ₱500,000 + up to 6 years imprisonment).
- RA 10175 (Cybercrime) – Harassing borrowers via online “shaming.”
9. Practical checklist for lenders of personal loans
- Put every interest stipulation in writing (Civil Code art. 1956).
- Compute and disclose the EIR—lump in processing fees, discount interest, finders’ fees, insurance premiums, etc. (RA 3765; BSP Cir. 730).
- Stay within sectoral caps (e.g., 6 %/mo. for SEC-regulated small loans, 24 % p.a. for credit cards).
- Avoid interest + penalty that together exceed roughly 36–48 % p.a.—Philippine courts have repeatedly found higher combined rates unconscionable.
- Provide a cooling-off period for online loans ≤ ₱10,000 (SEC MC 3-2022 requires at least one day).
- Use fair collection practices: no threats, no obscene language, no posting of borrower data on social media (SEC MC 18-2019; BSP Manual of Regulations for Banks, Part VIII).
10. Borrowers’ remedies
Pre-litigation – File a complaint with:
- SEC Financing and Lending Division (non-bank lenders),
- BSP Consumer Assistance Mechanism (banks, quasi-banks, credit-card issuers), or
- DTI Fair Trade Enforcement Bureau (false advertising).
Civil suit – Ask a court to:
- Invalidate or reduce the interest/penalty as unconscionable;
- Apply payments to principal first once interest is voided;
- Award moral and exemplary damages for abusive collection.
Criminal action – For harassment or data-privacy violations.
11. Pending and policy-direction
| Proposal | Status (as of May 2025) | Essence |
|---|---|---|
| House Bill 4386 / Senate Bill 1508 – “Predatory Lending Prevention Act” | Committee level | Would reinstate a 36 % p.a. national cap on all consumer-credit EIRs plus a 5 % penalty cap. |
| BSP Discussion Paper on “All-In APR Framework” (2024) | Public comments ended Jan 2025 | Seeks to standardize APR calculation across banks, lending companies, and digital platforms. |
| Digital Lending Platform Licensure Rules (draft SEC MC) | Circulated Mar 2025 | Would require platform-level licensing, escrow of borrower payments, and AI explainability for credit-scoring algorithms. |
12. Key take-aways
- No across-the-board statutory interest ceiling exists today; the Usury Law’s caps remain “suspended.”
- Sector-specific caps (credit cards, small loans, motorcycles) and the doctrine of unconscionability act as the functional guardrails.
- Disclosure and consumer-protection rules are stricter than ever; failure to comply can void interest and expose lenders to fines and reputational damage.
- Courts will generally honor freely negotiated rates unless they shock the conscience or violate a regulatory cap.
- Both borrowers and lenders should watch Congress and the BSP for a possible re-imposition of statutory ceilings or a uniform APR regime in the near term.
13. Quick reference to frequently cited authorities
- Act No. 2655 – Usury Law (1916)
- Central Bank Circular 905 (1982) – Suspends ceilings
- BSP MB Circular 799 (2013), Circular 1113 (2021, amended 2024) – 6 % legal interest; credit-card caps
- SEC MC 3-2022 – 6 %/month cap on small personal loans
- Medel v. CA, Nacar v. Gallery Frames, Spouses Abella v. Spouses Francisco – Unconscionable interest jurisprudence
- R.A. 9474, R.A. 8556, R.A. 3765, R.A. 7394 – Lending-company regulation, financing, Truth-in-Lending, Consumer Act
Bottom line: In the Philippines, usury in the classic sense is sleeping but not dead. Personal-loan interest is largely a matter of contract—yet contracts live under the watchful eyes of regulators and courts ready to strike down anything that crosses the line from profit to oppression. Lenders should price responsibly; borrowers should read (and keep) every disclosure; counsel on both sides must stay alert to the shifting regulatory tide.