Usury Laws and High-Interest Short-Term Loans in the Philippines

(A practical legal guide as of mid-2024; not legal advice)

Executive summary

There is no general ceiling on interest rates in the Philippines. The Usury Law (Act No. 2655) still exists, but the Bangko Sentral ng Pilipinas (BSP) lifted its interest-rate ceilings via Central Bank Circular No. 905 (1982). Charging “high” interest is not per se illegal.
Courts can still strike down or reduce “unconscionable” rates and charges. Using the Civil Code (e.g., freedom to contract limited by law, morals, and public policy; power to reduce iniquitous penalties), the Supreme Court has repeatedly voided or reduced oppressive interest and penalty rates.
Sector-specific rules matter. Banks, credit-card issuers, financing and lending companies, pawnshops, and online lenders are covered by different regulators (BSP or SEC) with distinct disclosure, licensing, collection-practice, and consumer-protection requirements.
Disclosure is mandatory. The Truth in Lending Act (RA 3765) requires lenders to state the true cost of credit (all finance charges), not just a nominal rate.
Abusive collection is prohibited. The SEC bans unfair debt-collection practices for financing and lending companies. Data privacy rules also restrict shaming, contact-list scraping, and similar tactics.
Default rules still apply. If interest isn’t in writing, none is due; if there’s no valid rate agreed, legal interest is 6% per annum under Nacar v. Gallery Frames and later jurisprudence.

I. Sources of law & regulators

Usury Law (Act No. 2655) – original statutory caps existed, but interest ceilings were lifted by Central Bank Circular No. 905 (1982). The statute itself was not repealed; provisions on documentation, penalties for violations of surviving parts, etc., still exist.
Civil Code
- Art. 1306: Parties may stipulate terms so long as they are not contrary to law, morals, good customs, public order, or public policy.
- Art. 1956: No interest is due unless expressly stipulated in writing.
- Arts. 1229 & 2227: Courts may reduce iniquitous or unconscionable penalties/liquidated damages.
Truth in Lending Act (RA 3765) – requires clear disclosure of finance charges and the effective cost of credit prior to consummation.
Financial Consumer Protection Act (RA 11765) – strengthens BSP/SEC/IC consumer-protection powers, including market conduct, disclosure, complaint handling, and enforcement.
Lending Company Regulation Act (RA 9474) – SEC licensing and regulation of lending companies (non-bank entities in the business of granting loans to the public).
Financing Company Act (RA 8556) – SEC regulation of financing companies (engaged in extending credit via leases/loans/installments).
BSP charter (RA 7653, as amended by RA 11211) – empowers BSP to regulate BSP-supervised institutions (banks, quasi-banks, credit-card issuers, pawnshops, etc.), including market-conduct rules and, in some areas, fee/interest limits.
Data Privacy Act (RA 10173) – regulates collection, use, and disclosure of personal data (relevant to online lenders’ contact-list access and shaming).
Special rules (BSP manuals/circulars; SEC memoranda) – e.g., pawnshop regulations, microfinance guidelines, credit-card limits (BSP-set and periodically adjusted), online lending platform (OLP) registration, and unfair collection prohibitions for SEC-regulated lenders.

II. The current status of “usury” in the Philippines

No general cap: Because Circular 905 suspended the Usury Law’s ceilings, parties may agree on any rate—but:
- Courts routinely invalidate or reduce rates and penalties they deem “unconscionable” (e.g., double-digit monthly rates, compounded default rates, stacked penalties).
- Hidden charges and fees disguised as “service charges” can be recharacterized as part of the finance charge and factored into the court’s unconscionability analysis.
Effect on criminal liability: With no ceiling, charging a high rate alone is not a crime under the Usury Law. Unlawful acts may still arise from unregistered lending, fraud, harassment/threats, data-privacy breaches, or false representations.

III. What counts as “unconscionable”?

There is no fixed statutory number. The Supreme Court, applying the Civil Code and equity, has:

Struck down or reduced interest rates such as 3%–5% per month (and higher), especially when coupled with additional penalties and compounding.
Reduced penalty charges (e.g., 3% per month penalties on top of steep interest) as iniquitous.
Converted excessive charges to a reasonable rate (often legal interest), or allowed only principal + reasonable returns, depending on the facts. Key takeaways for lenders and borrowers:
The higher the nominal rate (especially monthly rates), the more likely a court will moderate it.
Stacking (interest + default interest + separate monthly penalty + huge “service fees”) invites judicial reduction.
Compounded default interest is especially vulnerable.

IV. Interest, penalties, and legal interest—how they interact

Conventional (stipulated) interest – must be in writing (Civil Code Art. 1956).
Default (moratory) interest/penalty – may be stipulated, but courts can reduce if unconscionable (Arts. 1229/2227).
Legal interest – if no valid stipulation applies, or a court reduces rates, 6% per annum is generally used for loans/forbearance and judgments, following Nacar and later cases (with nuanced rules on when interest runs: from demand or filing for loans; from finality of judgment for damages not constituting loans/forbearance).

V. Short-term, high-interest products & how they’re regulated

1) Online lending apps (OLAs) / payday-style loans

SEC licensing is mandatory for lending/financing companies and separate registration for online platforms is typically required.
SEC has blacklisted and shut down unregistered or abusive OLAs and issued memoranda banning unfair collection practices (e.g., shaming, contacting people in a borrower’s phonebook, threats, profanity, false legal claims).
Data Privacy: Harvesting contact lists without proper consent, or public disclosure of debt, risks privacy and consumer-protection violations.
Disclosure: RA 3765 demands clear pre-contract disclosure of all finance charges (interest, processing, convenience, verification and similar fees).

2) Credit cards / cash advances

BSP-supervised. The BSP has, at various times, capped certain credit-card finance charges and fees. The exact caps change; issuers must follow current BSP circulars and disclosure rules.
Grace periods, minimum payment computations, and cash-advance fees are tightly regulated from a market-conduct standpoint.

3) Pawnshops

BSP-regulated under the MORNBFI. No uniform nationwide interest cap applies, but disclosure and conduct standards do.
Pawn is a pledge: the pawned item secures the loan; default triggers disposition rules in favor of the pawnbroker (subject to notice and record-keeping requirements).
Tickets/receipts must itemize charges so consumers can see the effective cost.

4) Microfinance, salary-deduction loans, BNPL

Microfinance by banks/NGOs follows BSP microfinance guidelines (pricing is typically market-based plus risk and operational costs).
Salary loans: deductions from wages require clear written consent and must respect Labor Code limits on permissible deductions.
BNPL providers may be bank-partnered (BSP) or lending/financing companies (SEC); either way, licensing, disclosure, and collection rules still apply.

5) Informal “5–6” lending

If done without SEC license (and to the public), it violates RA 9474. Using threats, coercion, or other unlawful tactics may violate the Revised Penal Code, consumer-protection, and data-privacy laws.

VI. Required disclosures (Truth in Lending Act, RA 3765)

Before consummation, the borrower must receive a clear written disclosure of:

Finance charge (the total cost of credit, including interest and fees), and
The effective cost of credit expressed on a per-annum basis (or as otherwise required by rules). Best practice is to show the effective interest rate (EIR/APR) and a sample amortization on a diminishing-balance basis.

Example (illustrative):

Face amount: ₱5,000, tenor: 14 days
Quoted “interest”: ₱500, processing fee (deducted upfront): ₱150
Cash disbursed: ₱5,000 − ₱150 = ₱4,850
Amount due after 14 days: ₱5,000 + ₱500 = ₱5,500
Periodic cost = (₱5,500 − ₱4,850) / ₱4,850 = 13.40% for 14 days
Simple annualized ≈ 13.40% × (365/14) ≈ ~349% per annum (rough APR; compounding would push this higher). Courts and regulators look at the true economic cost, not just the label.

VII. Collection practices: what’s not allowed

Harassment/threats, obscene/profane language, public shaming, and false representations (e.g., pretending to be a government agent or lawyer) are prohibited for SEC-regulated lenders.
Contacting third parties (family, co-workers, phonebook contacts) to shame or pressure payment risks SEC and Data Privacy violations; it may also create civil/criminal exposure.
Calling at unreasonable hours, posting debts on social media, or disclosing personal/loan data without lawful basis can be sanctionable.
BSP-supervised entities are bound by market-conduct standards and internal complaint-handling requirements.

VIII. Litigation & enforcement

If there’s no written interest agreement → no conventional interest (Civil Code Art. 1956).
If the stipulated rate is unconscionable → courts may reduce it (sometimes to 6% legal interest or another reasonable rate) and may also reduce penalties/fees.
When does interest run? For loans/forbearance, from demand or filing (if no earlier default trigger); for non-loan damages, from finality of judgment (standard Nacar framework).
Attorney’s fees and penalty clauses can be moderated if excessive.
Small-claims procedure (MTC) allows faster recovery of modest sums (monetary threshold is periodically revised by the Supreme Court).
Regulatory complaints:
- BSP Consumer Assistance – for BSP-supervised entities (banks, credit-card issuers, pawnshops, etc.).
- SEC Enforcement/CGFD – for lending/financing companies, especially unfair collection and unregistered operations.
- National Privacy Commission – for privacy violations (e.g., contact-list abuse, shaming).
- DTI/Local Government – advertising/consumer issues; PNP/NBI for threats, extortion, fraud.

IX. Drafting & compliance tips

For lenders

License correctly (SEC for lending/financing; BSP for banks/pawnshops; register each online platform as required).
Disclose clearly: state all finance charges, the EIR/APR, and provide an amortization schedule. Avoid flat-rate advertisements that hide true cost.
Avoid stacking: if you charge conventional interest, keep default interest/penalties modest and non-compounding.
Cap penalties (e.g., monthly, not per day), avoid compounding by default, and ensure any late fees are reasonable.
Collection: write policies aligned with SEC/BSP rules; train agents; no shaming or third-party disclosures without a lawful basis.
Data privacy: obtain valid consent, practice data minimization, and don’t harvest or misuse contact lists.
E-signatures: ensure E-Commerce Act (RA 8792) compliance; keep audit trails (timestamps, IPs, OTP logs).
Choice of venue/ADR: keep reasonable; abusive forum selection can be struck down.

For borrowers

Insist on a Disclosure Statement showing total finance charge and EIR/APR.
Watch for red flags: 3–5% per month (or higher), per-day penalties, compounding default interest, “flat 4%” ads without EIR, large upfront fees, and forced contact-list access.
If harassed: document calls/texts/screenshots; complain to SEC/BSP/NPC as appropriate and consider civil and criminal remedies.
If sued: raise unconscionability and lack of written stipulation (if applicable); ask the court to reduce rates and penalties.

X. Frequently asked questions

1) Is “usury” still illegal? The crime of usury tied to exceeding statutory ceilings has no bite because ceilings are suspended. But other illegal acts (unregistered lending, harassment, privacy violations, fraud) still apply. Courts also moderate unconscionable rates.

2) Can lenders charge any interest they want? They can agree to any rate, but courts may strike down or reduce rates/penalties deemed unconscionable—especially high monthly rates, compounded default rates, and stacked fees.

3) What if the contract says nothing about interest? Then no conventional interest is due (must be in writing). The court may still award legal interest (6% p.a.) from demand or filing if there is forbearance.

4) Are there any caps at all? General usury caps are suspended. However, BSP can (and has) imposed specific limits for some products (e.g., credit cards) by circular; check the latest circular for current numbers.

5) Can a lender contact my employer/family? Not to shame or pressure you. Unfair collection and privacy rules restrict third-party contacts and public disclosures.

6) Are “service charges” lawful? Yes, but they count toward the finance charge and affect EIR. Excessive or obscured fees can support an unconscionability finding.

XI. Checklist (quick compliance)

License & register (entity + online platform).
Written, clear loan agreement; written interest stipulation.
Truth in Lending disclosure with EIR/APR.
Reasonable interest; no compounding on default unless clearly justified.
Moderate, capped penalties/late fees.
Fair collection policy; no shaming/third-party disclosures.
Data privacy compliance; obtain specific, informed consent.
Complaint handling and record-keeping (tickets, receipts, statements).
Periodic review of BSP/SEC circulars and Supreme Court jurisprudence.

Final notes

The absence of ceilings does not mean a free-for-all. Philippine courts will protect borrowers against oppressive terms.
Because caps and procedural thresholds (e.g., credit-card limits, small-claims amounts) change over time, verify the latest BSP/SEC circulars and Supreme Court updates before making pricing or litigation decisions.
If you’re drafting or disputing a high-interest short-term loan, consider a formal legal opinion tailored to your facts (product, tenor, target market, channel, and current circulars).