Usury Laws and Weekly Compound Interest in the Philippines

Overview

“Usury” is the exaction of interest at an unconscionable or prohibited rate. In the Philippines, statutory ceilings once capped interest rates, but those ceilings were later suspended, creating a regime where parties may generally contract for any rate subject to (1) mandatory disclosure rules, (2) Civil Code limits (e.g., interest must be in writing; courts may strike down unconscionable rates and reduce penalties), and (3) sector-specific regulation (e.g., banks and credit cards). Weekly compounding is not per se illegal, but it is tightly constrained by these rules and by jurisprudence on “interest on interest.”

This article synthesizes the current legal framework, the practical boundaries set by case law, and how weekly compounding interacts with Philippine law.

1) Sources of Law and Regulatory Architecture

Usury Law (Act No. 2655, as amended).
- Historically imposed interest ceilings.
- Ceilings were later suspended by the Monetary Board (Bangko Sentral ng Pilipinas or BSP).
- The Usury Law itself was not repealed; it still supplies concepts (e.g., usury as policy concern), but there are no fixed statutory caps for most private loans.
Civil Code of the Philippines. Key provisions and doctrines:
- Interest must be expressly stipulated in writing to be due (Art. 1956). Absent a written stipulation, no conventional interest may be charged.
- Compound interest (anatocism) is not allowed by default. It requires a clear and express stipulation; even then, courts may disallow or pare down if unconscionable or punitive.
- Unconscionability and equity controls. Courts may strike down iniquitous interest and reduce penalties/liquidated damages when they are “iniquitous or unconscionable” (Arts. 1229, 2227).
- Good faith and public policy: freedom of contract (Art. 1306) is limited by law, morals, good customs, public order, or public policy.
Truth in Lending Act (R.A. 3765) and BSP’s Effective Interest Rate (EIR) disclosure rules.
- Lenders must clearly disclose the finance charge and EIR, preventing “rate obfuscation” (e.g., low nominal rate with heavy fees or frequent compounding).
- Noncompliance can be evidence of bad faith, trigger administrative sanctions (banking sector), and factor into civil disputes.
Sector-Specific Regulation.
- Banks and quasi-banks (BSP). Subject to prudential and market conduct rules, including disclosure and (for certain products) caps on charges (e.g., credit card finance charges and late fees, as periodically set and adjusted by BSP).
- Financing and Lending Companies (SEC). Subject to the Financing Company Act and Lending Company Regulation Act (registration, interest/fees disclosure, consumer protection, fair collection).
- Pawnshops and Microfinance (BSP-regulated). Special disclosure templates; some methods (e.g., flat rates) are allowed only with EIR disclosure to make costs comparable.
Judicial Doctrine (Selected Themes).
- The Supreme Court has repeatedly voided or reduced interest rates found “unconscionable,” even after the suspension of ceilings.
- Courts have converted or recomputed interest to the legal rate where warranted.
- Nacar v. Gallery Frames (2013) standardized the legal interest at 6% per annum (simple) for loans/forbearance of money and damages, with different start points (pre-judgment, post-judgment) depending on the cause (loan vs. damages).

Practical effect: Even without hard caps for most private loans, lenders who push rates or compounding to oppressive levels risk judicial reduction of interest and penalties, and potential reputational and regulatory exposure.

2) Is Weekly Compounding Allowed?

Yes, if—and only if—properly agreed in writing, clearly disclosed, and not unconscionable.

Express written stipulation is required. A generic clause like “prevailing rates, as may be changed unilaterally by lender” is unsafe; compounding frequency should be specific (e.g., “interest shall be computed at ___% per annum, compounded weekly”).
Disclosure of EIR. If a loan states a nominal annual rate but compounds weekly, the EIR can be significantly higher than the nominal. The lender must show the EIR (or an equivalent transparent cost disclosure).
Reasonableness controls. Even a properly disclosed weekly compounding provision can be cut down if it produces a punitive EIR given the transaction context (consumer loan vs. commercial credit, borrower sophistication, security, risk, duration, market conditions).
Interest on interest after default. Clauses that continue compounding on overdue interest can be attacked as penal and unconscionable, especially if layering default interest plus penalties plus weekly compounding.

3) Mechanics: How Weekly Compounding Works

Nominal vs. Effective. If the nominal annual rate is ( r ) (e.g., 24% = 0.24) and compounding is weekly (≈ 52 compounding periods/year), the effective annual rate (EAR/EIR) is:

[ \text{EAR} = \left(1 + \frac{r}{52}\right)^{52} - 1 ]

Example. Nominal 24% p.a., weekly compounding:
- ( (1 + 0.24/52)^{52} - 1 \approx 27.1% ) effective per year.
- The same nominal rate compounded monthly would yield ≈ 26.8%; daily ≈ 27.3%. The more frequent the compounding, the higher the effective cost.
Weekly billing vs. weekly compounding. A loan could bill weekly but compound monthly or not at all (simple interest). The contract must specify both billing interval and compounding frequency to avoid ambiguity.

4) When Do Courts Intervene?

Courts look at the totality: nominal rate, compounding, default interest, penalties, fees, and the borrower’s circumstances.

Typical red flags that have led courts to strike down or reduce charges:

Exorbitant monthly rates (e.g., double-digit per month) in consumer settings.
Stacked charges: base interest plus default interest plus penalty plus frequent compounding, especially after default.
One-sided escalation clauses (lender may raise rates anytime, without meaningful notice/consent).
Opaque disclosures: headline rate looks normal, but fees and compounding push the EIR to oppressive levels.

Common judicial remedies:

Reducing contractual interest to the legal rate (often 6% p.a.) from a certain point.
Treating penalty interest as liquidated damages and reducing it under Article 1229.
Invalidating compounding on accrued interest absent clear stipulation.
Disallowing interest-on-interest where it functions punitively.

5) Interplay With Default, Penalties, and Legal Interest

Default Interest vs. Penalty.
- Default interest compensates for delay; a separate penalty punishes breach. Courts scrutinize both together—high default interest and a hefty penalty often won’t stand.
When legal interest (6% p.a.) applies.
- If the contractual interest is void or reduced, courts often impose 6% p.a. simple interest from a defined point (e.g., date of demand or filing), following Nacar.
- Post-judgment, the amount due usually earns 6% p.a. until full payment.
Capitalization of interest (anatocism).
- Needs a clear agreement. Even then, courts may halt compounding on or after default and convert to the legal rate if the total burden is oppressive.

6) Sector-Specific Notes

Credit Cards.
- The BSP has, by circular, set maximum finance charges per month and caps on late fees, and has adjusted those caps over time depending on market conditions. Providers must comply with the prevailing cap and observe EIR disclosure.
- Weekly compounding is rare in this space; issuers typically calculate on a daily or monthly basis per cardholder agreement and BSP rules.
Microfinance / Small Loans.
- Some programs allow quoting “flat” rates, but EIR disclosure is still required so borrowers can compare true costs. Aggressive compounding structures on tiny loans tend to look punitive under judicial scrutiny.
Pawnshops, Financing and Lending Companies.
- Heavily disclosure-driven. SEC and BSP have penalized opaque pricing and abusive collection practices. Weekly compounding, while not banned outright, is unusual and risky unless plainly justified and disclosed.

7) Drafting Guidance (for Lenders and Counsel)

Do:

State the nominal annual rate and the compounding frequency in plain, bold language (e.g., “24% per annum, compounded weekly”).
Provide a sample amortization schedule and the EIR/EAR, together with a fee table (late fee, processing fee, prepayment charge, etc.).
Specify billing frequency (weekly/monthly) and how payments apply (fees → interest → principal).
Cap default/penalty charges to an amount defensible as reasonable compensation for risk and collection costs.
Build in notice-and-consent for any permissible rate changes.

Don’t:

Layer default interest + penalty + frequent compounding—courts often pare this back.
Hide material fees or rely on catch-all “prevailing rate” language.
Use compounding on already-overdue interest without a crystal-clear clause (and a strong reason).

Sample (illustrative only; customize to product & law):

“The Loan shall bear interest at ___% per annum, compounded weekly, computed on the outstanding principal balance. For disclosure, the Effective Annual Rate is estimated at ___%, inclusive of the effect of weekly compounding but exclusive of fees listed below. The Borrower acknowledges receipt of the Schedule of Fees and EIR computation.

In case of default, a default interest of ___% per annum (simple) shall apply in lieu of compounding from the date of default until full payment. A penalty of ___% per month, capped at PHP ___, may be charged for each month of continuing default. The Parties agree these charges are reasonable and not punitive.”

8) Borrower Checklist

Is the interest in writing? If not, contractual interest isn’t due.
Is compounding plainly stated? “Weekly compounding” should appear in the contract, not in a leaflet.
What is the EIR? Ask for it (and a schedule). Compare loans by EIR, not just nominal rates.
What happens on default? Check if the lender stacks default interest, penalties, and compounding—this is a red flag.
Are there sector caps? Credit card? Pawn? Check the current BSP/SEC caps and rules applicable to that product.
Keep records. Demands, receipts, and communications are crucial if a court later reviews unconscionability.

9) Computation Examples (for Orientation)

Weekly Compounding During Regular Term
- Principal: ₱100,000
- Nominal Rate: 24% p.a.
- Compounding: Weekly (52x)
- After 1 year: ( 100{,}000 \times (1 + 0.24/52)^{52} \approx ₱127,100 )
Simple Interest (No Compounding)
- Same inputs, but simple: ₱100,000 × (1 + 0.24) = ₱124,000 after one year.
Default Scenario (Common Court-Friendly Approach)
- Contractual period: 24% p.a., no compounding after default.
- Upon default: 6% p.a. legal interest on the adjudged amount from the date of judicial demand until full payment (following Nacar principles), unless the court finds a reasonable, non-punitive default rate was properly agreed.

These examples are stylized; precise numbers depend on exact dates, calendars, fees, and allocation rules.

10) Litigation and Enforcement Notes

Evidence wins cases. Courts reward parties who documented disclosures (EIR, fee tables) and sent clear demands.
Unconscionability is contextual. A rate that might fly in a high-risk, short-tenor commercial facility could be struck down for a small consumer loan.
Reformation vs. annulment. Courts often reform by reducing rates or substituting legal interest rather than voiding the entire loan.
Attorney’s fees and costs. Excessive enforcement tactics, or failure to follow disclosure rules, can boomerang into adverse fee awards or regulatory scrutiny.

11) Key Takeaways

No fixed interest ceilings for most transactions after the suspension of Usury Law caps—but this is not carte blanche.
Weekly compounding is lawful only if: (a) expressly agreed in writing, (b) clearly disclosed with EIR, and (c) reasonable in context.
Courts routinely cut down iniquitous interest, compound interest on arrears, and stacked penalties.
Legal interest (often 6% p.a.) plays a key remedial role when contractual provisions fail.
For credit cards and certain products, BSP sets specific caps that lenders must obey, on top of general law.

12) Practical Compliance Checklist (One Page)

Written stipulation of rate and compounding frequency.
EIR/EAR disclosed; sample schedule provided.
Fees itemized; no hidden charges.
Default interest or penalty (not both, or if both, modest and defensible).
No unilateral rate changes without meaningful consent.
For regulated sectors, confirm current BSP/SEC caps and circulars.
Keep audit trail of borrower acknowledgment and disclosures.

Final Note

This is a general overview tailored to Philippine law. Specific facts (borrower type, security, tenor, sector rules, and current BSP/SEC issuances) can materially change outcomes. For a live agreement or dispute, align contract drafting and computations with the latest circulars and jurisprudence, and consider obtaining counsel review.