A practical legal article in Philippine context (statutes, doctrines, and key Supreme Court rules as commonly applied as of August 2025).

1) Why “Usury” Still Matters Even Without a Fixed Usury Ceiling

In Philippine law, “usury” traditionally meant charging interest beyond a legal maximum. The classic statute is the Usury Law (Act No. 2655, as amended), which set interest ceilings and criminalized certain usurious practices.

However, for decades now, the Philippines has operated largely under a market-based interest regime because interest ceilings were suspended through Central Bank/BSP issuances (most famously, CB Circular No. 905 (1982)). The practical result:

There is generally no single across-the-board statutory cap on interest for all loans.
But interest rates and related charges are still constrained by:
- the Civil Code’s formal requirements (especially on when interest is even due),
- equity and public policy (courts can strike down or reduce unconscionable rates),
- and sector-specific regulation (e.g., BSP rules for certain products).

So today, the question usually isn’t “Is it usury?” in a strict ceiling-based sense. The question becomes:

Was interest validly imposed?
Was it properly disclosed and agreed in writing?
Is the rate (or penalty structure) unconscionable or iniquitous?
Is compounding permissible under the Civil Code and jurisprudence?
Do BSP/SEC/other regulations impose specific limits for this kind of credit?

2) The Non-Negotiables: Civil Code Rules That Control Interest

Even in a deregulated environment, the Civil Code sets hard rules that lenders cannot bypass.

A. Interest is not due unless agreed expressly and in writing

Civil Code, Article 1956: No interest shall be due unless it has been expressly stipulated in writing.

Implications:

If the loan agreement is silent on interest, the lender cannot later claim “customary interest” just because it’s common in business.
If interest is verbally agreed but not in writing, it is generally not collectible as “interest” (though other remedies like damages may apply depending on facts).

B. Interest must be clear: rate, basis, and triggers

A valid interest stipulation should state:

the rate (e.g., 2% per month),
the basis (monthly, per annum),
and when it accrues (from release date? from default?).

Vague clauses are risky, and courts tend to interpret ambiguities against the drafter (often the lender).

C. Courts can reduce “iniquitous” penalty clauses

If the contract uses penalty interest, liquidated damages, or other default charges that are excessive, courts may reduce them under Civil Code, Article 1229 (reduction of iniquitous/unconscionable penalties).

3) What “Legal Interest” Means in the Philippines (When There’s No Stipulated Rate)

When parties did not validly stipulate an interest rate (or the stipulation fails), Philippine law uses “legal interest” rules developed by BSP circulars and Supreme Court doctrine.

A. The benchmark legal rate (commonly applied): 6% per annum

For many years, courts applied a 12% legal interest in loans/forbearance; this changed after BSP adjusted the legal interest rate framework. Under prevailing doctrine, 6% per annum has been widely applied in appropriate cases (especially where there is no stipulated rate or for judgments), subject to the specific classification of the obligation and the timing.

B. The “Eastern Shipping / Nacar” framework (core jurisprudence)

Two landmark lines of cases are routinely cited:

Eastern Shipping Lines v. CA (1994) – earlier structured guidelines for interest application in obligations and judgments.
Nacar v. Gallery Frames (2013) – updated application after the BSP rate change, including how courts apply interest before and after finality of judgment.

Practical takeaway: the interest analysis depends on:

whether the obligation is a loan/forbearance or damages,
whether the amount is liquidated or unliquidated,
and the relevant time periods (before demand, from demand, from judgment finality).

4) Compound Interest (Anatocism): When It’s Allowed and When It’s Not

A. The general policy: compounding is not automatic

Philippine law is cautious about anatomism—charging interest upon interest—because it can balloon debts quickly.

B. The key rule: interest on interest requires specific conditions

Civil Code, Article 1959 is the centerpiece rule on compound interest. In substance, it allows interest due to earn interest only when:

the interest is due and unpaid, and
the parties agree (typically understood as requiring a clear stipulation, often in writing), and
the agreement relates to interest that has already accrued (not merely a blanket authorization that automatically capitalizes future interest in a way that defeats the protective policy).

Practical drafting note: Many lenders try to include “capitalization” clauses. These must be written clearly, applied fairly, and not operate as a disguised usury/unconscionable device.

C. Judicial demand rule: interest due can earn legal interest once sued upon

Even when the contract does not allow compounding, the Civil Code provides a mechanism akin to limited compounding in litigation:

Civil Code, Article 2212: Interest due shall earn legal interest from the time it is judicially demanded, even if the obligation is silent.

Meaning:

Once a lender files a case (judicial demand), overdue interest amounts may themselves start earning legal interest, as a matter of law.
This is not “free-for-all compounding”; it is a specific legal consequence tied to judicial demand.

D. What courts scrutinize most in compounding disputes

Philippine courts often examine:

Was there a valid written interest stipulation at all? (Art. 1956)
Was compounding/capitalization clearly and fairly agreed? (Art. 1959 + policy)
Is the effective annualized burden unconscionable? (equity/public policy)
Is the “penalty interest + compounding + fees” stack oppressive? (Art. 1229 reduction; unconscionability)

5) Unconscionable Interest: The Modern “Anti-Usury” Doctrine

Because fixed ceilings are generally suspended, the Supreme Court’s main control lever has become unconscionability.

A. What counts as unconscionable?

There is no single numeric threshold for all cases. Courts assess:

the magnitude of the rate,
the borrower’s circumstances (necessitous situation, adhesion contracts),
the presence of negotiation or absence of meaningful choice,
the total effective cost (interest + default interest + penalties + fees),
and market/context indicators.

In many cases, the Court has reduced extraordinary monthly rates (especially those that explode annually) and penal structures that function as punishment rather than compensation.

B. Common outcomes when interest is found excessive

Courts may:

reduce the stipulated interest to a reasonable rate,
reduce penalty charges under Art. 1229,
or in extreme cases, refuse enforcement of oppressive stipulations and revert to legal interest standards.

Important nuance: Courts do not do this automatically. The borrower typically must raise the issue, and the court evaluates facts and equities.

6) Compound Interest in Banking and Commercial Practice

A. Bank loans often contain capitalization provisions

Banks and regulated financial institutions frequently use:

periodic interest accrual,
default interest,
and sometimes capitalization mechanisms (e.g., for restructuring).

Even when common in banking, these clauses are not immune from:

Art. 1956 (written stipulation),
Art. 1959 (anatomism limits),
consumer protection/disclosure rules,
and unconscionability review.

B. Special BSP regulations may impose product-specific limits

While the general market regime allows parties to set rates, BSP has, in some periods, imposed caps for specific products—notably credit card receivables (a well-known example of product-level interest limitation). If a transaction falls under a capped product category, the regulatory cap controls.

(If you’re applying this to a live matter, verify the current BSP issuance governing that exact product because caps and definitions can change.)

7) Lending Companies, Online Lending, and SEC Oversight

Non-bank lenders (lending/financing companies) operate under SEC registration and regulation frameworks (e.g., lending and financing company laws) alongside:

Truth in Lending Act (RA 3765) and disclosure rules,
consumer protection enforcement (administrative),
and general civil law principles.

Even if a rate isn’t “usurious” by a fixed ceiling, lenders can still face serious risk if:

disclosures are deficient,
collection practices are abusive,
or pricing is found oppressive when challenged in court.

8) How Courts Compute Interest and “Interest on Interest” in Litigation

In Philippine litigation, interest can appear in layers:

Contract interest (if validly stipulated in writing)
Default/penalty interest (if stipulated, but reducible if iniquitous)
Legal interest (applies when no valid rate, or for certain judgment components)
Post-judgment interest (interest on the adjudged amount until paid)
Interest on interest after judicial demand (Art. 2212 mechanism)

Because outcomes depend heavily on:

whether the obligation is a loan/forbearance vs damages,
when demand was made,
and when judgment became final and executory,

it’s common for decisions to specify distinct periods with different interest treatments.

9) Practical Checklists

A. For lenders (to make interest and compounding enforceable)

Put the interest rate in writing (Art. 1956).
State whether the rate is per annum or per month, and how it accrues.
If you want compounding/capitalization, draft it carefully to align with Art. 1959 and avoid oppressive effects.
Avoid stacking multiple punitive charges (high penalty interest + liquidated damages + compounding + fees).
Ensure truth-in-lending disclosures are complete and accurate.

B. For borrowers (to challenge oppressive terms)

Check whether interest was expressly stipulated in writing.
Compute the effective annual cost, including penalties and fees.
Argue unconscionability and/or seek reduction under Art. 1229.
Examine whether “capitalization” violates the protective policy behind Art. 1959.
If sued, remember that judicial demand can affect how interest runs (including Art. 2212 effects).

10) Common Misconceptions (Philippine Reality Check)

“Usury is illegal, so any high interest is void.” Not exactly. With ceilings generally suspended, the fight is usually over unconscionability, disclosure, and civil code compliance—not a simple numeric cap.
“Compound interest is always illegal.” Not always. It’s restricted, not banned—allowed only under legal conditions (notably Art. 1959) and subject to fairness review.
“If I signed it, I can’t question it.” You often still can, especially when terms are oppressive, adhesive, or penal, because courts may reduce iniquitous stipulations.
“If there’s no interest clause, the lender gets nothing.” The lender may still recover the principal and possibly legal interest in certain contexts (and damages where proper), but “interest as interest” needs a written stipulation.

11) Key Legal Anchors (for citation in pleadings or memos)

Act No. 2655 (Usury Law) – historical statutory framework; ceilings largely suspended by monetary authority issuances.
Civil Code
- Art. 1956 – interest must be expressly stipulated in writing
- Art. 1959 – rules on interest earning interest (anatomism/compounding limits)
- Art. 1229 – reduction of iniquitous penalty clauses
- Art. 2212 – interest due earns legal interest from judicial demand
Jurisprudence (core doctrinal guideposts)
- Eastern Shipping Lines v. CA (1994) – interest computation framework
- Nacar v. Gallery Frames (2013) – updated framework after legal interest rate changes

12) Bottom Line

In the Philippines, modern “usury law” analysis is less about a universal numerical ceiling and more about validity (written stipulation), fairness (unconscionability), and controlled compounding (Art. 1959 + litigation rules). Compound interest can be enforceable, but it is never presumed, and it is heavily scrutinized—especially when paired with high default charges and penalties.

If you want, tell me what situation you’re writing for (e.g., bank loan, private loan, online lending, credit card, promissory note dispute, collection case), and I’ll tailor this into a tighter practitioner article with sample clauses and a litigation-ready issue outline.