A legal article in Philippine context

1) Why “usury” in the Philippines is not what people assume

In everyday talk, “usury” means any high or “unfair” interest. In Philippine law, historically, usury referred to charging interest above ceilings fixed by law or the Monetary Board. But for decades now, Philippine policy has largely been market-based interest rates, with courts stepping in mainly through equity and public policy when rates are unconscionable.

So today, the practical legal question is often not “Is it usury?” but:

Is the interest properly stipulated and enforceable?
Is the rate unconscionable/excessive under jurisprudence?
Are there special laws/regulations that cap or regulate the transaction?
Are collection practices unlawful even if the rate is “agreed”?

2) Core legal sources you must know

A. The (old) Usury Law framework

Act No. 2655 (The Usury Law) (as amended) historically set interest ceilings and penalized violations.
Over time, ceilings were modified by legislation and Monetary Board issuances.

B. The shift: Monetary Board authority and the suspension of ceilings

The turning point is Central Bank Circular No. 905 (1982) (issued under then-existing Central Bank authority; now within the BSP’s framework), which lifted/suspended interest rate ceilings for loans and forbearance of money. In effect:

Parties could contract interest freely (subject to law, morals, good customs, public order, public policy), and
Courts retained power to strike down unconscionable rates.

Important nuance: The Usury Law was not “repealed” in the simple sense; rather, its ceilings became inoperative due to the lifting of ceilings. This is why many disputes are litigated as unconscionability rather than “technical usury.”

C. Civil Code provisions that still control interest

Even with ceilings lifted, the Civil Code governs how interest is created, proven, and collected—especially:

Article 1956 – No interest shall be due unless expressly stipulated in writing.
- If there’s no written stipulation, the lender may still recover the principal, but not contractual interest.
Article 2209 – If an obligation consists in the payment of money and the debtor is in delay, the indemnity for damages is the legal interest, unless a different rate is stipulated.
Article 2212 – Interest due shall earn legal interest from the time it is judicially demanded (a key rule on anatocism / interest-on-interest).

There are other provisions that matter (e.g., rules on void clauses, obligations, damages, iniquitous stipulations), but those three are the “interest essentials.”

D. Jurisprudence: the “unconscionable interest” doctrine

Philippine courts—especially the Supreme Court—regularly hold that even if interest is written and “agreed,” courts may reduce or nullify it when it is excessive, iniquitous, unconscionable, or shocking to the conscience. This doctrine is the modern substitute for hard usury ceilings in many private disputes.

3) Key definitions in Philippine interest disputes

“Loan” vs. “forbearance of money”

Loan: money is delivered and must be returned (mutuum).
Forbearance: a creditor refrains from demanding payment when due (e.g., extensions, restructuring, unpaid balances allowed to roll over). Both can generate interest.

“Interest” vs. “penalty” vs. “finance charge”

Creditors sometimes label charges as:

service/processing fees
“add-on” charges
penalty charges
default fees
finance charges
collection charges

Courts and regulators may look at substance over form—if the charge functions like compensation for the use of money, it may be treated as interest (or part of the effective cost of credit), especially when assessing unconscionability.

4) The enforceability checklist: when interest is collectible

A. The interest must be expressly stipulated in writing (Art. 1956)

A verbal agreement to pay interest is not enough.
The writing should reflect the rate and the parties’ assent.
Promissory notes, loan agreements, disclosure statements, and signed schedules usually satisfy this.

B. Clarity matters

Ambiguous interest clauses are commonly construed against the drafter (often the lender), especially in consumer contexts.

C. Default interest vs. penalties

Many contracts impose:

regular interest (for the term)
default interest (upon delay)
penalty charges (liquidated damages)
attorney’s fees and costs

A common litigation issue is whether the combined stack becomes punitive and unconscionable.

5) “Usury” today: what remains of the concept

A. With ceilings generally lifted, “usury” is rarely pleaded as a pure ceiling violation

Because interest rate ceilings were suspended, the classic usury framework (rate exceeds a legal ceiling) usually doesn’t apply to ordinary private loans.

B. But “excessive interest” is still actionable—through other doctrines

Even without ceilings, courts may still intervene through:

unconscionability / iniquitous stipulations
public policy limitations
fraud, undue influence, or adhesion contract analysis
consumer protection frameworks (in appropriate cases)

C. Sector-specific regulation may still cap or constrain certain products

Some credit products and regulated entities may be subject to special rules (e.g., banking regulations, SEC rules for lending/financing companies, consumer credit regulations, pawn-related rules). Even where there is no single universal ceiling, regulatory policy can impose limits, disclosure requirements, and compliance duties.

6) The Supreme Court approach to “unconscionable” interest

A. No single magic number

Philippine jurisprudence does not set one permanent ceiling applicable to all cases. Instead, the Court looks at context, including:

the borrower’s bargaining position and sophistication
whether the transaction is commercial vs. consumer/personal
the presence of collateral and risk profile
market conditions at the time
the existence of compounding, stacking penalties, or hidden fees
whether the rate is “shocking” compared with typical lending rates

B. Courts can reduce, not just void

A frequent outcome is judicial reduction of interest to a rate the Court considers equitable, rather than throwing out the entire loan. The principal obligation usually remains.

C. What happens if interest is struck down?

Common remedial patterns:

Interest clause voided → borrower pays principal, plus possibly legal interest as damages if in delay.
Rate reduced → borrower pays at the reduced judicial rate, and overpayments may be credited/refunded depending on circumstances.
Penalty and default interest moderated → courts often trim punitive add-ons.

D. Interaction with legal interest rules

Separately from the contract, courts apply legal interest doctrines for:

loans/forbearance where interest is due as damages for delay
judgments (pre-judgment and post-judgment interest)

A landmark framework (commonly applied in modern cases) aligns legal interest at 6% per annum under BSP policy changes effective July 1, 2013, subject to specific case posture and timing.

7) Legal interest in the Philippines (practical overview)

A. If there is no written interest stipulation

No contractual interest is due (Art. 1956).
But once the debtor is in delay, the creditor may recover legal interest as damages (Art. 2209), depending on the case.

B. If there is a written interest stipulation but it’s unconscionable

The court may reduce it or nullify it, then apply legal interest or another equitable rate.

C. Court judgments

When money judgments are awarded, Philippine doctrine commonly applies legal interest rules that distinguish:

interest as damages before finality, and
interest on the judgment amount after finality until satisfaction.

(Exact application depends heavily on the nature of the obligation and the procedural posture.)

8) Compounding and “interest on interest” (anatocism)

A. General rule: you can’t casually compound

Even if parties agree on interest, charging interest on unpaid interest is regulated.

B. When interest-on-interest can apply

Under Article 2212, interest due earns legal interest from judicial demand (e.g., filing of the complaint), even if the contract is silent—this is one of the most litigated interest rules.

Separate from Art. 2212, compounding may be recognized if:

there is a clear written stipulation allowing it (subject to unconscionability review), or
the arrangement is valid under the governing regulatory framework for the entity/product.

C. Why this matters

Many “runaway debt” scenarios come from:

compounding +
default interest +
penalties +
fees stacked together, which courts may later find inequitable.

9) Disclosure and consumer-protection angles

A. Truth in Lending Act (RA 3765)

For covered consumer credit transactions, RA 3765 aims to ensure borrowers are informed of:

finance charges
effective interest cost
other key credit terms

Noncompliance can create defenses and regulatory consequences and can support claims that a borrower did not meaningfully consent to the true cost of credit.

B. Lending and financing companies (SEC-regulated)

Entities engaged in lending as a business often fall under:

Lending Company Regulation Act (RA 9474)
Financing Company Act (RA 8556)

These laws require registration and compliance; they also provide hooks for enforcement when lenders impose abusive terms or engage in unlawful collection conduct.

C. Collection conduct can be illegal even if the debt is valid

Borrowers may have remedies where collection involves:

harassment, threats, shaming, or doxxing
improper disclosure of debt to third parties
deceptive practices
misuse of personal data (Data Privacy Act implications may arise)

So “excessive interest” disputes frequently pair with collection-abuse complaints.

10) Criminal liability: is charging high interest a crime today?

Historically, usury could be criminally punishable as a ceiling violation. In the modern regime—where ceilings have generally been lifted—the classic “charging above the ceiling” prosecution is usually not the operative path for ordinary loans.

However, other criminal statutes can become relevant depending on facts, such as when the lending scheme involves:

fraud, deceit, or falsified documents
harassment and threats amounting to coercion/extortion-like conduct
illegal access or misuse of personal information
violations of special regulatory requirements (when penal provisions apply)

In short: the interest rate alone is often not what triggers criminal exposure; the scheme and conduct may.

11) Practical litigation questions courts actually ask

If a dispute reaches court, expect these recurring issues:

Was there a written stipulation of interest?
Is the stated rate clear and proven by competent evidence?
Are there add-on charges that function as disguised interest?
Is the overall charge structure unconscionable (rate + penalties + compounding)?
What is the proper “equitable” rate if the stipulated rate is void/reduced?
From what date should interest run (default date, demand, filing, judgment finality)?
Are attorney’s fees and liquidated damages justified or excessive?
Were there regulatory violations (truth-in-lending disclosures, licensing, unfair collection)?

12) Common scenarios and how Philippine law tends to treat them

A. Friendly loans / private loans with handwritten notes

Principal usually enforceable.
Interest enforceable only if clearly in writing.
Courts are more likely to reduce “shockingly high” rates, especially when borrower is unsophisticated.

B. Loans with “per month” rates that balloon

Courts scrutinize:

how high the annualized effective rate becomes, and
whether penalties/fees make the burden oppressive.

C. Default clauses that add multiple layers

Example pattern:

regular interest continues, plus
default interest, plus
penalty charge, plus
attorney’s fees

Philippine courts often moderate stacked charges if the result is punitive.

D. Rolling loans / refinancing traps

When debt repeatedly rolls over with fees and compounding, disputes often involve:

unconscionability
disclosure failures
collection abuses

13) Drafting and compliance notes (for lenders and borrowers)

For lenders (risk management)

Put interest terms expressly in writing; be clear on rate basis (per month/per annum), method (add-on vs diminishing), and due dates.
Avoid “stacking” that looks punitive: excessive default interest + penalties + compounding.
Ensure required disclosures are provided in consumer contexts.
Keep collection practices lawful and privacy-compliant.

For borrowers (red flags and defenses)

If interest was never written, challenge contractual interest (Art. 1956).
If the rate and add-ons are oppressive, invoke unconscionability and request judicial reduction.
Scrutinize whether fees are disguised interest.
Document harassment or privacy violations by collectors.

14) Bottom line: what “all there is to know” reduces to

Classic usury ceilings are largely suspended, so most fights are not “illegal because it exceeds a cap,” but “unenforceable because it’s unconscionable or improperly stipulated.”
Interest must be in writing to be collectible as contractual interest.
Courts can and do reduce excessive rates and moderate penalties, often applying legal interest rules to restore fairness.
Regulation still matters: disclosure, licensing, and collection conduct can create liability even when a principal debt is valid.
The “right” answer in any particular dispute depends on documents, timing (demand/judicial action), and the total charge structure.

If you want, paste a sample interest clause (with numbers anonymized) and I can analyze it under Philippine doctrines on written stipulation, unconscionability, compounding, penalties, and how courts typically re-compute the obligation.