Usury Laws and Excessive Interest Rates on Loans in the Philippines

Introduction

In the Philippine legal system, the regulation of interest rates on loans has evolved significantly over time, balancing the need for accessible credit with protections against exploitative lending practices. Usury, traditionally defined as the charging of excessive or illegal interest on loans, was once strictly regulated under dedicated laws. However, with economic liberalization, the framework has shifted toward contractual freedom, tempered by judicial oversight and consumer protection statutes. This article provides a comprehensive overview of the historical development, current legal provisions, judicial interpretations, and remedies available concerning usury and excessive interest rates in the Philippines. It focuses on loans between private parties, including those from banks, non-bank financial institutions, and informal lenders, while highlighting key principles from the Civil Code, banking regulations, and relevant jurisprudence.

Historical Background

The regulation of interest rates in the Philippines traces its roots to Spanish colonial laws, which were influenced by canon law prohibitions on usury. Post-independence, the Usury Law of 1916 (Act No. 2655, as amended) set maximum interest rates: 12% per annum for secured loans and 14% for unsecured ones, with higher rates permissible only in specific cases like those involving pawnshops. Violations were punishable as criminal offenses, including fines and imprisonment.

This rigid ceiling persisted until the 1970s and 1980s, when economic pressures, including inflation and the need for financial deregulation, prompted reforms. In 1974, Presidential Decree No. 116 amended the Usury Law to allow the Central Bank (now Bangko Sentral ng Pilipinas or BSP) to adjust ceilings. The pivotal change came with Central Bank Circular No. 905, Series of 1982, which suspended the interest rate ceilings under Sections 2, 3, 4, 4-a, 5, 6, 7, 8, 9, and 9-b of the Usury Law. This effectively decriminalized usury by removing statutory caps, allowing market forces to determine rates. The suspension was justified as a means to promote credit flow and align with global financial trends.

Despite this, the core prohibition against unconscionable interest rates remained intact through civil law principles, ensuring that while parties could agree on rates, courts could invalidate those deemed exploitative.

Current Legal Framework

The Philippine legal framework on interest rates is primarily governed by the New Civil Code (Republic Act No. 386), BSP regulations, and supplementary laws. Key provisions include:

1. Stipulation of Interest (Civil Code, Article 1956)

Interest on loans or forbearance of money must be expressly stipulated in writing to be enforceable. Without such stipulation, no interest accrues. This protects borrowers from implied or hidden charges.

2. Legal Interest Rate

In the absence of a stipulated rate, or when the stipulated rate is void, the legal interest applies. As per BSP Circular No. 799, Series of 2013 (effective July 1, 2013), the legal interest rate is 6% per annum on the principal amount. This rate also applies to judgments involving loans or forbearance of money (monetary interest) and to breach of obligations (compensatory interest). Prior to this, the rate was 12% under Central Bank Circular No. 416 (1974).

For loans with stipulated interest, the rate compounds annually if not paid, unless otherwise agreed (Article 1959, Civil Code).

3. Freedom to Stipulate Rates

Post-1982, parties have broad latitude to agree on interest rates, reflecting the principle of mutuality of contracts (Article 1308, Civil Code). However, this freedom is not absolute. Rates must not violate public policy, morals, or good customs (Article 1306). The BSP regulates rates for supervised financial institutions, such as banks and lending companies, through circulars like BSP Circular No. 1133, Series of 2021, which mandates fair lending practices.

4. Special Regulations for Certain Loans

Pawnshops: Governed by Presidential Decree No. 114 (Pawnshop Regulation Act), maximum interest is 2.5% per month for loans up to P500, scaling down to 1% for larger amounts. Appraisal fees and other charges are capped.
Credit Cards: Under Republic Act No. 10870 (Credit Card Industry Regulation Law) and BSP Circular No. 1098, Series of 2020, interest rates are market-driven but must be disclosed. Effective interest rates (EIR) are calculated inclusive of fees, with a cap on penalties at 2% per month.
Microfinance and Small Loans: The Microfinance NGOs Act (RA 10693) and BSP regulations promote reasonable rates for low-income borrowers, often below 3% per month.
Salary Loans and Government Employee Loans: Limited by the Government Service Insurance System (GSIS) or Social Security System (SSS) rules, with rates typically at 6-8% per annum.

5. Disclosure Requirements (Truth in Lending Act, RA 3765)

Lenders must disclose all finance charges, including interest, fees, and effective rates, before consummation of the transaction. Non-compliance renders the undisclosed charges unenforceable and subjects the lender to penalties up to P100,000 or imprisonment.

6. Consumer Protection Laws

The Consumer Act of the Philippines (RA 7394) prohibits deceptive practices in lending. The Financial Products and Services Consumer Protection Act (RA 11765, 2022) empowers the BSP, Securities and Exchange Commission (SEC), and Insurance Commission to regulate unfair terms in financial contracts, including excessive interest.

What Constitutes Excessive Interest

While no fixed ceiling exists post-1982, interest rates are deemed excessive if they are "iniquitous, unconscionable, and exorbitant," rendering them void ab initio (from the beginning). The threshold is determined case-by-case, considering factors like the borrower's bargaining power, economic conditions, and the loan's purpose.

Quantitative Benchmarks: Jurisprudence often cites rates exceeding 3% per month (36% per annum) as presumptively excessive, especially for unsecured loans. Rates of 5-10% per month have been struck down in numerous cases.
Qualitative Factors: Courts examine if the rate shocks the conscience, exploits necessity, or results from unequal bargaining. For instance, rates imposed on distressed borrowers or through adhesion contracts (standard forms) are scrutinized more strictly.
Compounding and Additional Charges: Escalation clauses allowing unilateral rate increases are valid only if reasonable (Article 1958). Hidden fees that inflate the effective rate can make the interest excessive.

Judicial Interpretations

The Supreme Court has played a crucial role in defining excessive interest through landmark decisions:

Medel v. Court of Appeals (1998): Declared a 5.5% monthly rate (66% annually) unconscionable, reducing it to 12% per annum (then-legal rate).
Chua v. Timan (2008): Held that stipulated rates are prima facie valid but void if iniquitous. A 7% monthly rate was voided.
Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (2013): Confirmed the suspension of the Usury Law but emphasized judicial power to equitably adjust rates.
Spouses Limso v. Philippine National Bank (2016): Upheld escalation clauses but voided rates that became excessive due to unilateral hikes.
Nacar v. Gallery Frames (2013): Clarified the application of legal interest at 6% post-2013, including on monetary judgments.
Recent Cases (e.g., 2020s): Courts have invalidated rates in online lending apps exceeding 2% per day, citing RA 11765 and BSP Circular No. 1133, which target predatory fintech practices.

In corporate loans between sophisticated parties, higher rates may be upheld if arms-length (e.g., Macalinao v. Bank of the Philippine Islands, 2013).

Protections for Borrowers

Borrowers facing excessive interest have several safeguards:

Voiding of Interest: Courts can declare excessive stipulations void, applying only the legal rate or none at all (Article 1413, Civil Code).
Refund of Excess Payments: Overpaid interest is recoverable as solutio indebiti (undue payment) under Article 2154.
Regulatory Oversight: The BSP supervises banks and quasi-banks, while the SEC oversees financing companies. Complaints can be filed with these agencies for administrative sanctions.
Anti-Predatory Lending Measures: The Lending Company Regulation Act (RA 9474) requires licensing for lenders, with revocation for usurious practices. Informal lenders (e.g., "5-6" schemes) face scrutiny under anti-usury campaigns by the Department of Trade and Industry (DTI).
Debt Relief Programs: During crises (e.g., COVID-19), BSP issued moratoriums on payments and rate caps via Bayanihan Acts (RA 11469 and 11494).

Penalties and Remedies

Civil Remedies: Borrowers can file actions for annulment of contracts, damages, or restitution in Regional Trial Courts.
Criminal Penalties: While usury per se is decriminalized, related acts may constitute estafa (swindling) under Article 315 of the Revised Penal Code if involving deceit, or violations of RA 3765 (fines up to P10,000 or imprisonment up to 6 months).
Administrative Sanctions: BSP can impose fines up to P1 million per day for violations by supervised entities. Unlicensed lenders face closure and penalties under RA 9474.
Class Actions: Groups of borrowers can pursue collective remedies under consumer laws.

Conclusion

The Philippine approach to usury and excessive interest rates reflects a transition from strict ceilings to flexible, market-oriented regulations, with strong judicial and regulatory checks to prevent abuse. While contractual freedom prevails, the emphasis on equity ensures protection for vulnerable borrowers. Lenders must prioritize transparency and reasonableness to avoid legal pitfalls. As economic conditions evolve, ongoing reforms—such as enhanced fintech regulations—continue to shape this landscape, underscoring the need for borrowers to seek informed advice and for policymakers to balance growth with fairness. For specific cases, consultation with legal professionals is essential, as outcomes depend on factual nuances.