Usury Laws & High-Interest Lending in the Philippines
A comprehensive legal-practice primer (updated to July 2025)
1 Historical Origins of Philippine Usury Regulation
| Milestone | Key Provisions & Effects |
|---|---|
| Act No. 2655 (Usury Law, 1916) | • Fixed maximum interest ceilings (12% p.a. on secured loans, 14% p.a. on unsecured; later amendments allowed 6-10 percentage-point surcharges for small-amount loans). • Empowered courts to declare any excess “void” and order its refund/credit against the principal. |
| Central Bank (CB) Circular No. 905 (Dec. 22 1982) | • “Suspended” all ceilings until otherwise prescribed by the Monetary Board, inaugurating interest-rate liberalization. • Crucially, did not repeal Act 2655—it merely withdrew numeric caps. |
| Bangko Sentral ng Pilipinas (BSP) Charter, R.A. 7653 (1993) | • Re-created BSP; §109 authorises the Monetary Board to re-impose ceilings “whenever warranted”. • Adopted the in duplum rule (interest stops accruing when unpaid interest equals the principal for banks & quasi-banks). |
| General Banking Law, R.A. 8791 (2000) | • Reinforced in duplum (§48) & prudential limits on compound interest. • Gave the BSP wide supervisory power to curb abusive rates by regulated entities. |
| Sector-specific caps (2020-present) | • Credit cards: BSP Circular 1098 (Sept 2020) → 2 %/month (24 % p.a.) ceiling on finance charges; Circular 1165 (Aug 2023) raised the cap to 3 %/month (36 % p.a.). • Pawnshops & Microfinance: ceilings set in periodic BSP circulars (currently 3 %/month for pawn ticket interest; slightly higher for service fees). |
Effect: Since 1982, general statutory caps have been off, but sector-specific and judicial restraints remain potent.
2 Civil-Code Foundations
| Civil Code Article | Practical Impact |
|---|---|
| Art 1956 | Interest is not recoverable unless expressly stipulated in writing. |
| Art 1229 / 1366 | Courts may equitably reduce or invalidate penal clauses (including excessive interest) when they are “iniquitous or unconscionable.” |
| Art 1159 & 1306 (Autonomy of Contracts) | Freedom to stipulate rates is recognized but never absolute; clauses contrary to law, morals, or public policy are void. |
| Art 2212 & 2213 | Judicial interest may be awarded in lieu of illegal conventional interest. |
3 The Supreme Court’s “Unconscionability” Doctrine
Although CB Circular 905 liberalised rates, the Court consistently voids or reduces rates it deems oppressive. Representative rulings:
| Case (Year) | Stipulated Rate | Court’s Holding |
|---|---|---|
| Medel v. CA (1998) | 5.5 % per month (66 % p.a.) | Declared “shockingly iniquitous”; reduced to 12 % p.a. |
| Spouses Abella v. Spouses Abella (2010) | 6 % per month | Reduced to 12 % p.a.; cited Art 1229. |
| Security Bank v. Solid Homes (2014) | 21 % p.a. + 25 % penalty | Penalty cut to 3 % p.a.; underscored that banks, as fiduciaries, must observe extraordinary diligence. |
| Nacar v. Gallery Frames (2013, en banc) | Established uniform judicial interest guidelines: • 12 % p.a. (pre-July 1 2013 transactions) • 6 % p.a. (thereafter) for monetary awards (loans, damages, etc.), whether reduced interest or substituted legal interest. |
|
| Sps. Castro v. Tan (2022) | 3 % per month + 3 % penalty | Both rates voided; court imposed 6 % p.a. simple interest from demand. |
Rule of Thumb (2025): Rates ≥ 3 %/month (36 % p.a.) are presumptively unconscionable unless the lender shows legitimate commercial justification and the borrower is not a consumer.
4 Regulatory Landscape Beyond the Courts
BSP Supervision
- Issuances under R.A. 11765 (Financial Products & Services Consumer Protection Act, 2022) allow BSP to cap or roll back rates anytime to protect consumers.
- Circular 1166 (2023) requires full APR disclosure (Total Cost of Credit) and prohibits “flat-rate” advertising.
Securities & Exchange Commission (SEC)
- R.A. 9474 (Lending Company Regulation Act): lending and financing companies must register & comply with reporting; repeated online-lending app violations (e.g., “doxxing” & harassment) lead to license revocation.
- SEC regularly cites the in duplum rule when ordering refund of usurious interest collected by unlicensed lenders.
Department of Trade & Industry (DTI)
- Under RA 10644 (Go Negosyo Act) and Consumer Act, DTI may enforce disclosure norms on purchase-money loans (e.g., appliance/installment plans).
Special Regimes
- Agri-Agra Reform Credit Act (RA 10000) incentivises banks to lend to agri-borrowers at concessionary rates.
- Microfinance NGOs Act (RA 10693) caps effective interest at 33 % p.a. and requires declining-balance computation.
5 Practical Guidance for Practitioners & Borrowers
| Scenario | Action Points |
|---|---|
| Drafting loan contracts | • State the rate numerically & in words. • Include an interest-rate floor & cap tied to prevailing 91-day T-bill rate plus spread. • Insert a “reduction/blue-pencil” clause: parties agree to reform excessive interest to the highest lawful rate. |
| Litigating excessive-interest cases | • Plead Art 1229 and cite the unconscionability line of cases. • Argue relative bargaining power, nature of loan (consumer vs. commercial), and prevailing market rates. • Ask courts to apply Nacar judicial interest from date of demand. |
| Enforcing promissory notes | • Remember Art 1956: no written stipulation → no conventional interest recoverable. • If note includes both interest and penalty, courts often delete the penalty when interest is already high. |
| Bank collection & restructuring | • Check in duplum compliance (sum of unpaid interest, penalties, charges ≤ principal). • R.A. 9504 allows tax deductibility of write-offs only if bank follows in duplum. |
| Consumer-credit advisory | • For credit cards, confirm the current BSP ceiling (3 %/mo as of July 2025). • Inform clients that “0 % installment” deals usually load the cost into cash price; APR disclosure is mandatory. |
| FinTech & payday-loan compliance | • Register with the SEC and secure BSP opinion if using e-money channels. • Cap total cost of credit to align with court tolerance (< 36 % p.a.), or risk cease-and-desist orders. |
6 Common Myths Debunked
| Myth | Reality |
|---|---|
| “There is no more Usury Law.” | Act 2655 remains, but numeric ceilings are suspended; the statute still provides the cause of action for refund of excess interest. |
| “Any agreed rate is valid after CB Circular 905.” | Courts routinely strike down rates they find inequitable. The circular does not override Civil Code safeguards. |
| “Compound interest is illegal.” | Compounding is valid if expressly agreed (Art 1959) and not unconscionable; banks must still honor in duplum. |
| “Judicial interest is always 6 %.” | Nacar sets 6 % p.a. for judicial awards post-July 2013, but contractual interest may be higher if reasonable. |
| “In duplum applies to all lenders.” | Statutory in duplum applies only to banks & quasi-banks; courts sometimes extend the principle equitably to unregulated lenders but are not bound to do so. |
7 Emerging Issues (2025 Outlook)
Digital Lending & AI-based Credit-Scoring
- BSP consultative paper (March 2025) proposes a “Borrower Bill of Rights” including algorithmic interest-rate transparency.
Climate-transition Financing
- Bills pending in Congress seek concessional “green-loan” caps; may re-introduce sectoral usury ceilings.
Regional Integration (ASEAN)
- Harmonisation talks consider adopting an ASEAN Effective Interest Rate Standard, which could pressure the Philippines to codify APR caps similar to Malaysia’s Moneylenders Act.
8 Key Take-Aways
- Numeric caps were lifted in 1982, but the Usury Law still provides the legal hook against excessive interest.
- Courts, via the “unconscionability” doctrine, function as de-facto regulators, routinely trimming rates above ~36 % p.a.
- Sector-specific caps (credit cards, pawnshops, microfinance) and the in duplum rule offer additional statutory brakes.
- Well-drafted contracts, transparent APR disclosures, and awareness of Supreme Court benchmarks remain the best protection for both lenders and borrowers.
This article is for informational purposes only and does not constitute legal advice. For loan-specific concerns, consult Philippine counsel or appropriate regulators (BSP Consumer Affairs & SEC Financing & Lending Division).