Usury Laws on Excessive Interest in Family Loans in the Philippines (All information current as of 9 June 2025)
I. Introduction
Loans between relatives are typically informal, but the moment interest is imposed—even just “for formality”—the transaction is subject to the same legal regime that governs commercial lending. This article gathers, in one place, everything a Philippine lawyer, judge, or layperson needs to know about (i) the Usury Law and its continuing relevance, (ii) caps (or the lack of caps) on interest, and (iii) how courts handle “excessive” or “unconscionable” interest rates in intra-familial loans.
II. Statutory and Regulatory Framework
| Instrument | Core Provision | Current Effect |
|---|---|---|
| Act No. 2655 (Usury Law, 1916) | Imposed ceilings (6–12% p.a. for money loans; 1 %/month on pawns). | Still in force but ceilings no longer operative. |
| Central Bank (CB) Circular 905 (22 Dec 1982) | “The rate of interest… shall be determined and agreed upon by the parties.” | Suspended all statutory ceilings. |
| Bangko Sentral ng Pilipinas (BSP) MB Circular 799 (21 Jun 2013) | Reset the legal (judicial) interest to 6 % p.a. | Governs interest adjudged by courts when the contract is silent or after default. |
| Civil Code of the Philippines | • Art. 1956 – “No interest shall be due unless expressly stipulated in writing.” • Arts. 1306 & 1409 – Autonomy of contracts limited by law, morals, public order; void contracts. • Art. 1229 – Courts may reduce penal clauses if iniquitous or unconscionable. |
Provides grounds for striking down or moderating excessive interest. |
| Family Code (1988) | No special rules on loans between relatives, but Art. 87 voids donations between spouses and Art. 124 requires conjugal consent for onerous contracts. | May surface if the interest charge is disguised generosity or affects conjugal property. |
| Tax Code (NIRC) | Forgiveness or non-collection of interest may be deemed a taxable donation. | Relevant when parents “waive” interest from children. |
III. The Usury Law After Circular 905—Alive but Toothless?
Ceilings are suspended, not repealed. The statute remains good law; only the rates are in abeyance.
Why it still matters:
- Criminal liability for collecting beyond the old caps no longer attaches, because the caps themselves are inoperative.
- Other provisions (e.g., documentary stamp exemptions for low-value loans) remain.
IV. Judicial Doctrine on “Excessive” or “Unconscionable” Interest
Although parties are free to fix any rate, the Supreme Court has repeatedly voided or reduced rates it considers shocking to the conscience, relying on Arts. 1306, 1229, 1409 and the public-policy clause. Key cases—especially helpful for family-loan fact patterns—include:
| Case | Interest Stipulation | Court’s Ruling |
|---|---|---|
| Medel v. CA (G.R. 131622, 27 Nov 1998) | 5 % per month (60 % p.a.) | Reduced to 12 % p.a. (then legal rate) as “excessive, iniquitous.” |
| Castro v. Tan (G.R. 168940, 9 Feb 2011) | 5 % per month on a personal loan between friends (cousins). | Reduced to 12 % p.a. |
| Sps. Abella v. Abella (G.R. 164119, 15 Aug 2012) | 10 % per month (120 % p.a.) | Reduced to 12 % p.a.; court stressed “family ties do not justify oppression.” |
| Nacar v. Gallery Frames (G.R. 189871, 13 Aug 2013) | Not about rate caps but fixed legal interest at 6 % p.a. post-judgment. | Now the default benchmark when the loan or judgment is silent on rate. |
| Heirs of Rey Santos v. Sps. Marcos (G.R. 213221, 10 Feb 2021) | 6 % per month | Slashed to 6 % p.a.; reaffirmed pro-borrower stance. |
Practical take-away: Any rate exceeding roughly 24 % p.a. (2 % per month) now faces a serious risk of judicial reduction unless the lender can prove commercial necessity and free bargaining.
V. Special Rules for Family Loans
Writing Requirement (Art. 1956).
- Oral promise by a parent to charge 3 % per month is void as to interest; only the principal is enforceable.
Presumption of Donation or Condonation.
- If no interest (or later forgiveness) is shown, tax authorities may treat the foregone interest as a gift subject to donor’s tax—but BIR generally overlooks de minimis or purely private acts.
Conjugal Consent and Spousal Protection.
- A spouse who pledges community property as collateral for a sibling’s loan without the other spouse’s written consent renders the mortgage voidable (Family Code, Arts. 96, 124).
Psychological Pressure & Undue Influence.
- Courts scrutinize intra-familial lending for signs of moral coercion; unconscionability is more readily found.
VI. Computing Interest: Scenarios and Benchmarks
| Situation | Governing Rule | Typical Rate Today |
|---|---|---|
| Contracted rate in writing, ≤ 24 % p.a. | Generally upheld. | 12 % p.a. is still common ceiling in promissory notes. |
| Contracted rate > 24 % p.a. | Subject to possible reduction as “unconscionable.” | Courts often reset to 12 % p.a. or 6 % p.a. after Nacar. |
| No rate stipulated, but in default | Legal interest under BSP Circ. 799 – 6 % p.a., from date of demand or filing. | 6 % p.a. |
| No written contract at all | Interest cannot be collected; only principal recoverable. | 0 % |
| Judgment award (loan or damages) | 6 % p.a. from finality until satisfaction. | 6 % p.a. |
VII. Enforcement, Defenses, and Litigation Tips
Prescription:
- 10 years for written loans (Art. 1144); 6 years for unwritten (Art. 1145).
Evidence:
- Keep promissory notes, bank transfers, text messages. Courts are stricter with family claims because of presumed gratuity.
Partial Nullity:
- Striking down the interest clause does not erase the principal. The borrower must still repay what was actually received.
Re-documentation:
- Parties may voluntarily restructure the loan at a legal rate; doing so cuts off litigation risk and donor’s-tax exposure.
Good-faith payments:
- Amounts already paid under a void interest clause may be imputed to principal, not refunded, unless borrower proves fraud.
VIII. Tax and Estate Considerations
Donor’s Tax (now 6 % flat on net gifts above ₱250 k/year):
- Waiving interest may be a gift; seldom enforced among close family, but worth noting for large sums.
Estate Freeze Planning:
- Parents occasionally use low-interest loans to advance inheritances; structure as on-demand, interest-free notes to avoid immediate tax while retaining control.
Documentary Stamp Tax (DST):
- Loans > ₱250 k require DST (₱1 for every ₱200 of principal). Many family loans overlook this; seldom audited unless notarized.
IX. Best Practices Checklist for Family-Loan Documentation
- Put it in writing: specify amount, rate, schedule, grace period.
- Keep rate reasonable: ≤ 1 % per month is the current safe harbor.
- State the purpose (e.g., medical expense) to justify soft terms.
- Add a clause on reduction: “If the stipulated rate is held unlawful, parties agree to the legal interest instead.”
- Secure collateral cautiously: get spousal consent if property is conjugal.
- Provide for mediation: avoids public airing of family disputes.
X. Conclusion
The formal suspension of usury ceilings in 1982 did not give lenders—least of all relatives—a free hand to impose sky-high interest. Philippine courts wield public policy and equity to strike down or pare back rates they deem punitive, especially where blood ties blur the voluntariness of acceptance. For lawyers structuring or litigating family loans, three touchstones will decide the case:
- Written proof of the interest agreement (Art. 1956).
- Reasonableness of the rate in light of current commercial standards.
- Absence of moral pressure or hidden donative intent.
Approached with clear documentation and moderate terms, intra-familial lending can meet genuine financial needs without running afoul of the still-living Usury Law or its modern judicial substitutes.