A practitioner’s guide to history, current rules, caps, remedies, and drafting tips

1) Snapshot

There is no general statutory ceiling on interest rates. Since the early 1980s, maximum rates under the Usury Law (Act No. 2655) were effectively lifted by Central Bank action.
Interest may be freely stipulated (party autonomy), but courts will strike down unconscionable rates and pare back iniquitous penalties.
Special caps exist for specific products (e.g., credit cards) and certain regulated sectors (pawnshops, microfinance, lending/financing companies) via Bangko Sentral ng Pilipinas (BSP) and SEC regulations.
No interest is due unless expressly agreed in writing (Civil Code). Compound interest requires an express stipulation.
Even without a cap, lenders must comply with disclosure rules (Truth in Lending Act) and consumer protection standards; violations can trigger administrative, civil, and—even where other laws are breached—criminal consequences.

2) The Legal Architecture

2.1 Usury Law (Act No. 2655), as amended

Originally imposed ceilings and criminal penalties for charging usurious interest.
Through subsequent presidential decrees and central bank issuances in the early 1980s—most notably the suspension of ceilings—the Usury Law’s rate limits became inoperative, although the statute technically remains on the books.
Practical effect: No fixed, across-the-board percentage cap today; courts and regulators police abusive or unconscionable pricing and practices.

2.2 Civil Code anchors

Art. 1306: Freedom to contract—subject to law, morals, good customs, public order, and public policy.
Art. 1956: No interest is due unless expressly stipulated in writing.
Art. 1959/1960 (principles on interest on interest): As a rule, accrued interest does not itself earn interest unless expressly agreed and the interest has become due.
Art. 1229 & 2227: Courts may reduce penalties/liquidated damages that are iniquitous or unconscionable.
Damages vs. interest: Distinguish (a) stipulated monetary interest for the use or forbearance of money, from (b) moratory/compensatory interest awarded as damages for delay.

2.3 Jurisprudence (guiding themes)

Philippine courts have repeatedly:

Struck down “shocking” rates (e.g., 5–10% per month and similar) as unconscionable, reducing them to reasonable levels.
Reduced penalty charges (e.g., 10–20% penalty or more) when combined with high stipulated interest and default interest.
Applied the “legal interest” benchmark for damages: the Supreme Court pegged legal interest at 6% per annum (replacing the historic 12%) from 1 July 2013 onward for judgments and for loans/forbearance when no specific rate applies; otherwise, the contract rate governs until default or until substituted by the judgment rate.

Practice pointer: Even if the contract states “market-based” or “mutually agreeable” interest, specify a clear numerical rate (and review it against industry norms) to avoid uncertainty or allegations of abuse.

3) Regulatory Layer: Sector-Specific Caps & Conduct Rules

While there is no general cap, lenders should watch product-specific rules:

Credit Cards (BSP): The Monetary Board has imposed explicit ceilings on credit-card finance charges and certain fees via circulars (e.g., maximum monthly interest/finance charge and caps on installment add-on and cash-advance fees). The exact numeric caps can change by circular; check the latest BSP circular in force on the transaction date.
Pawnshops: Rates are not governed by the old Usury Law ceilings, but pawnshops are BSP-regulated and bound by standardized pawn tickets, disclosure, and limits/format on fees (e.g., storage/handling). Local ordinances may add requirements.
Lending and Financing Companies (SEC): Subject to licensing, reporting, fair collection and disclosure rules (including for digital lenders). The SEC and other agencies have sanctioned harassing or abusive collection practices.
Microfinance/MGOs & special programs: May operate under tailored frameworks, often emphasizing effective interest rate (EIR) disclosure and borrower protection.
Truth in Lending Act (RA 3765) & BSP disclosure rules: Lenders must clearly disclose the finance charge and EIR/APR. Failure to disclose can ground civil liability, regulatory sanctions, and consumer complaints even when the nominal rate itself is lawful.

Compliance tip: Always disclose EIR/APR, all fees, penalties, and compounding methodology in bold, plain language, and mirror the numbers across the offer sheet, loan agreement, and promissory note.

4) What Counts as “Unconscionable”?

There is no magic number. Courts look at totality:

Magnitude & structure of the rate: e.g., 6–10% per month (72–120% p.a.) commonly flagged; add-on vs. EIR; teaser rates that jump post-default.
Stacking: Base interest + default interest + penalty + recurring fees + compounding on charges.
Borrower profile & context: Inequality of bargaining power, take-it-or-leave-it templates, limited literacy, urgent necessity, and lack of competition.
Disclosure quality: Hidden fees, misleading APR, or opaque compounding are red flags.
Enforcement methods: Harassing collection, doxxing, or unauthorized contact lists invite sanctions and can taint enforceability.

Courts often blue-pencil the rate (reduce to a reasonable level), strike or slash penalties, and apply the 6% legal interest from judicial demand or judgment, depending on the posture of the case.

5) Interest Taxonomy (and how courts treat them)

Stipulated monetary interest (for the use/forbearance of money)
- Valid if in writing (Civil Code).
- No general cap, but subject to unconscionability review.
Default (penalty) interest
- Kicks in after breach; often higher than the regular rate.
- Can be reduced if iniquitous, especially when combined with other charges.
Penalty charges / liquidated damages
- Separate from interest; may be cut down by courts if excessive (Arts. 1229, 2227).
Legal interest (6% p.a. since July 1, 2013)
- Applies as damages for delay or substitutes the contract rate upon judgment when appropriate.
Compounded interest
- Requires express stipulation; otherwise barred. Even if stipulated, the effective burden (EIR) can render it unconscionable on the facts.

6) “Prohibited” or Risky Interest Practices (even without a cap)

Charging interest without a written stipulation (void as to interest).
Misstating or hiding the EIR/APR; front-loading fees to game the APR.
Interest-on-interest without clear authority or compounding more frequently than disclosed.
Stacked penalties producing runaway balances.
Unfair collection (threats, shaming, scraping contact lists), which can breach data privacy, consumer protection, and SEC/BSP rules.
Confessions of judgment, blank endorsements, or post-dated checks leveraged with abusive threats—courts scrutinize these closely.

7) Remedies & Enforcement

7.1 For borrowers

Civil action/defense: Invoke unconscionability, seek reformation or nullity of abusive clauses; request recomputation using reasonable rates; ask for damages for abusive collection.
Regulatory complaints:
- BSP (banks, credit cards, pawnshops);
- SEC (lending/financing companies, online lenders);
- DTI and Consumer Act agencies for unfair or deceptive acts;
- NPC for data privacy abuses;
- LGU for local business-permit violations.
Criminal avenues: While “usury” prosecutions faded with suspended ceilings, estafa, grave coercion, cybercrime, anti-harassment, and data privacy violations may apply based on conduct.

7.2 For lenders

Enforce principal and reasonable interest; expect judicial trimming if rates/penalties are high.
Document compliance: Maintain signed, written stipulations, TILA disclosures, pricing memos, and collection SOPs.
Cure letters & restructures: Offering a grace period or rate step-down can avert litigation and show good faith.

8) Documentation & Drafting Checklist (Philippine loans)

A. Core commercial terms

Principal; nominal rate (% p.a.); compounding (if any) and frequency; default rate; penalty (if any); tenor; amortization; prepayment rights/fees.

B. Compliance block

Express written stipulation on interest (Civil Code).
TILA paragraph: finance charge breakdown; EIR/APR; itemized fees; sample computation; cooling-off (if applicable).
No interest-on-interest unless expressly agreed; if agreed, state when accrued interest becomes principal for compounding.

C. Fairness guardrails

Cap and collar (e.g., default rate not to exceed x% p.a.).
Penalty moderation clause (acknowledges court’s power to adjust).
Hardship/restructure pathway; no-harassment collection covenant.

D. Data & collections

Consent for data processing limited to loan administration; no third-party disclosure except as permitted by law.
Contact rules: specific times/channels; bar shaming/doxxing.

E. Governing law & venue

Philippine law; venue where borrower resides or where contract is executed (avoid oppressive forum selection).

9) Computation Notes (to stay out of trouble)

Quote both the nominal and the EIR/APR.
If using add-on or discounted interest, demonstrate the EIR; many disputes arise from nominal 2–3% “monthly” add-on that equates to very high annual EIR.
State the order of application of payments: (1) fees, (2) interest, (3) principal—unless you prefer a different, disclosed order.
Late charges vs. default interest: Avoid double-counting (e.g., 5% late fee and a jump from 24% to 60% p.a.).
Prepayment: Disclose whether interest is rebated pro-rata or rule-of-78s (the latter is controversial—avoid unless justified and clearly explained).

10) Frequently Asked Questions

Q1. Is there a maximum lawful rate I can charge? General answer: No fixed cap applies across all loans. But excessive rates and stacked penalties are vulnerable to judicial reduction and regulatory action. Certain products (e.g., credit cards) do have current caps by BSP circular.

Q2. We agreed verbally on 3% per month. Is that enforceable? No. Interest must be in writing. Without a written stipulation, only legal interest (6% p.a.) may be awarded as damages in proper cases.

Q3. Can I compound interest monthly? Yes only if the borrower expressly agrees in writing and the agreement specifies when interest capitalizes. Even then, courts may strike or reduce the burden if the effective rate is unconscionable.

Q4. Can a court rewrite our penalty clause? Yes. Under the Civil Code, courts may reduce iniquitous or unconscionable penalties.

Q5. Are pawnshops and online lending apps exempt from any limits? They are regulated. While no general usury cap applies, BSP and SEC enforce disclosure, pricing, and conduct rules (and, for some products, caps). Abusive collection can trigger sanctions.

11) Practical Playbooks

11.1 For lenders

Benchmark pricing to industry ranges; avoid monthly rates that look punitive on their face.
Keep penalty interest modest (e.g., a narrow step-up) or cap total charges over time.
Use plain-English disclosures with worked examples.
Vet collection scripts against consumer protection and data privacy rules.

11.2 For borrowers (and counsel)

Audit contracts for: missing written interest, hidden fees, compounding language, stacked penalties, abusive collections clauses.
If sued, raise unconscionability, ask for recomputation, and push for legal interest post-judgment.
Consider regulatory complaints alongside court remedies when conduct (not just price) is abusive.

12) Key Takeaways

The Usury Law’s ceilings are suspended, not repealed; there is no general cap, but courts curb unconscionable interest and penalties.
Written stipulation is indispensable; compound interest must be expressly agreed.
Legal interest is 6% p.a. (since 1 July 2013) for judgments/forbearance where applicable.
Sectoral caps and disclosure duties (BSP/SEC/TILA) can turn a “lawful” rate into an unlawful practice if mis-disclosed or combined with abusive collection.
The safest strategy is transparent pricing, reasonable penalties, and clean collections.

Disclaimer

This article provides general information on Philippine law and jurisprudential trends. It is not legal advice for specific transactions. For current numeric caps applicable to credit cards or particular regulated products, consult the latest BSP/SEC issuances and obtain tailored counsel.