A Philippine legal article on what “usury” means today, how interest is regulated, when “excessive” interest can be struck down, and the practical rules courts actually apply.

1) Usury, in plain terms

Usury traditionally means charging interest beyond a legal ceiling. In many countries, usury laws set a hard cap (e.g., “no more than X% per year”), and charging beyond that is illegal.

In the Philippines, the picture is more nuanced: the old “Usury Law” exists, but for most private loans, statutory interest ceilings have long been suspended, so disputes today are usually decided through:

Civil Code rules on interest and contracts, and
court doctrines on “unconscionable” or “inequitable” interest, plus
product-specific regulatory caps (for certain financial products, when applicable).

So in practice, modern Philippine “usury” litigation is often less about a fixed numerical cap and more about whether the interest is validly agreed upon and whether it shocks the conscience.

2) The historical “Usury Law” and why it rarely operates as a hard cap today

2.1 Act No. 2655 (the Usury Law)

The Philippines’ traditional usury statute is Act No. 2655 (Usury Law), which originally set maximum legal interest rates and penalized usurious contracts.

2.2 Suspension of ceilings

Over time, monetary authorities issued rules that effectively lifted/suspended the interest ceilings for most loans. The policy direction for decades has been toward market-determined rates, especially for commercial credit.

Result: For many loan arrangements, you will not find a single, universal “usury cap” that automatically voids interest above a number.

But this does not mean lenders can charge anything with impunity. It means the battleground moved from “cap-compliance” to contract validity + fairness review.

3) The core Civil Code rules you must know (the foundation of modern PH interest disputes)

3.1 Freedom to contract—limits included

Philippine law generally respects the parties’ freedom to stipulate interest. But that freedom is limited by:

law,
morals,
good customs,
public order, and
public policy.

This is the gateway for courts to strike down oppressive rates even without a hard statutory cap for the loan type.

3.2 Interest must be in writing (critical rule)

Under the Civil Code, interest is not demandable unless it has been expressly stipulated in writing.

Practical effect:

If a lender sues and the borrower proves there is no written agreement on interest, the court can deny contractual interest and apply only legal interest (if appropriate), depending on the nature of the obligation and the circumstances.

3.3 Principal vs. interest

Even when interest is invalid or reduced, the borrower generally still owes the principal (the amount actually received), unless the transaction itself is void for a separate reason (fraud, illegality, lack of consent, etc.).

4) “Excessive” interest in the Philippines: the unconscionable interest doctrine

Because broad ceilings are typically suspended, Philippine courts developed a strong doctrine:

Courts may reduce (or even remove) interest that is unconscionable, iniquitous, or outrageous.

4.1 What makes an interest rate “unconscionable”?

Courts look at the totality of circumstances, such as:

the rate itself (especially if it’s extremely high per month),
whether the borrower had real bargaining power or was under distress,
whether the interest resembles a penalty rather than compensation for use of money,
whether there are stacked charges (interest + penalties + service fees) that balloon the debt,
whether the lender is using the rate to oppress rather than to price risk.

4.2 What courts usually do when they find the rate excessive

Common judicial outcomes include:

reducing the agreed interest to a lower “reasonable” rate;
deleting contractual interest entirely and substituting legal interest;
reducing penalties (especially “penalty interest” or liquidated damages) to prevent double punishment.

Important: Courts typically do not reward the borrower with a free pass on principal. The usual aim is equity—stop the overreach, enforce what is fair.

5) Interest vs. penalties vs. other charges (and why lenders lose cases)

Many “excessive interest” disputes are really about how the charges are structured.

5.1 Regular interest

This is the price for using money (e.g., “3% per month on the outstanding balance”).

5.2 Penalty interest / liquidated damages

This is charged because of default (e.g., “additional 5% per month if unpaid”). Even if the regular interest looks tolerable, penalty stacking can make the total unconscionable.

Philippine courts have authority to reduce penalties when they are iniquitous or unconscionable, even if agreed in writing.

5.3 Compounding

If interest is compounded aggressively (interest charged on interest), courts may scrutinize it closely—especially where compounding functions as a hidden penalty.

5.4 Service fees, processing fees, “notarial” fees, collection fees

These can be valid if reasonable and properly agreed, but they are frequent sources of abuse. When these charges cause the effective rate to explode, courts may treat the overall package as oppressive.

6) Legal interest (when there is no valid stipulation, or when the court substitutes it)

Even when contractual interest is denied or reduced, a court may impose legal interest depending on what is owed and why.

6.1 The modern baseline: 6% per annum in many contexts

Since reforms to legal interest policy, 6% per annum is commonly used as the legal interest rate in many cases involving:

loans/forbearance of money when interest is due, and/or
judgments awarding sums of money (subject to the governing rules on when interest starts to run).

6.2 “Loans/forbearance” vs. “damages” distinction

Philippine jurisprudence distinguishes interest for:

loan or forbearance (compensation for use/withholding of money), vs.
damages (compensation for injury), with different rules on when interest begins (e.g., from demand, from filing of complaint, or from finality of judgment), depending on the nature of the obligation and the certainty of the amount.

This timing is often as important as the rate.

7) Product-specific regulation: where “caps” still appear in real life

Although the general usury ceilings are typically suspended, caps can still exist through regulators for specific financial products or supervised entities.

7.1 Banks and BSP-supervised financial institutions

Banks are primarily governed by banking laws and regulations. For certain products (notably credit cards), the regulator has imposed maximum rates/fees at various times through policy issuances.

If a cap applies to the product and institution, violating it can trigger regulatory consequences and affect enforceability.

7.2 Lending companies and online lending platforms (SEC-regulated)

Lending companies (as corporations engaged in lending) and many online lending platforms fall under SEC regulatory supervision and consumer-protection style rules on disclosures, fair collection practices, and prohibited acts. Even without a universal statutory “usury” cap, they can face:

license sanctions,
administrative penalties, and
enforcement actions for abusive terms, unlawful collection, or deceptive practices.

7.3 Pawnshops and microfinance

These may be governed by specialized regulatory frameworks and may have their own pricing/disclosure rules depending on the entity and product type.

Bottom line: Always identify the lender type (bank? lending company? cooperative? individual?), because the applicable rules can change dramatically.

8) Truth in Lending Act (disclosure law) and how it intersects with “excessive interest”

The Truth in Lending Act framework in the Philippines focuses heavily on clear disclosure of the cost of credit (finance charges, effective interest, etc.).

A loan can be attacked not only as “excessive,” but also as improperly disclosed—especially where hidden charges or confusing computations prevent the borrower from understanding the true cost.

Disclosure violations often strengthen a borrower’s equitable arguments and can lead to regulatory or civil consequences, depending on the facts.

9) Common scenarios and what usually happens in court

Scenario A: “The promissory note has 10% per month interest.”

If properly written and signed, the interest is stipulated—but 10% per month is very likely to be scrutinized.
Courts frequently reduce extremely high monthly rates as unconscionable, sometimes down to a more reasonable level or to legal interest.

Scenario B: “There’s interest but it wasn’t written—only verbal.”

Contractual interest can be denied (because interest must be in writing).
The creditor may still recover principal and possibly legal interest, depending on demand/default rules.

Scenario C: “Interest is moderate, but penalty is brutal (e.g., +5% per month on default).”

Courts may uphold some interest but reduce the penalty sharply, especially if it creates a debt spiral.

Scenario D: “The borrower claims usury, but signed everything.”

Signing helps the lender on consent, but not on equity.
Courts can still reduce unconscionable interest/penalties even if agreed.

10) Practical guidance: how to analyze whether an interest rate is legally vulnerable

Step 1: Identify the lender and product

Individual lender? Lending company? Bank? Cooperative? Pawnshop?
Credit card? Salary loan? Business loan? Short-term online loan? This determines if special caps/regulations apply.

Step 2: Gather the documents

Key evidence:

promissory note / loan agreement
disclosure statements
schedule of payments / ledger
proof of releases (how much money actually received)
demand letters / collection messages
receipts or payment confirmations

Step 3: Compute the “effective” cost

Don’t stop at stated interest. Add:

penalties, service fees, collection fees, compounding effects. Courts respond strongly to debt ballooning.

Step 4: Check the writing requirement

No written stipulation on interest = big problem for the lender.

Step 5: Assess unconscionability factors

monthly rates that are extreme,
multiple layers of penalties,
borrower distress and lack of bargaining power,
confusing or hidden charges.

11) Remedies and defenses

For borrowers (when sued or threatened)

Possible defenses/requests:

deny contractual interest if not written;
ask the court to reduce unconscionable interest and penalties;
challenge undisclosed/hidden charges;
dispute the computation and require strict proof of amounts.

For lenders (to keep interest enforceable)

Best practices:

put the interest and all charges clearly in writing;
ensure compliance with disclosure requirements;
avoid punitive “stacking” that makes the total cost indefensible;
keep clean records showing the borrower received the principal.

12) Key takeaways (Philippine context, as it operates today)

The Philippines historically had statutory usury ceilings, but for many loans, those ceilings have been suspended, so there is not always a universal numeric cap.
Even without a cap, courts can strike down or reduce interest and penalties that are unconscionable.
Interest must be expressly stipulated in writing to be collectible as contractual interest.
Legal interest (commonly 6% per annum in many modern contexts) is frequently used when courts substitute or when obligations become due under legal standards.
Some products/entities may be subject to specific regulatory caps and consumer-protection rules, so always classify the lender and loan product before concluding “no cap applies.”

Legal-note style disclaimer

This is a general legal article for educational purposes and not legal advice for any specific case. If you want, describe your exact loan terms (rate per month, penalties, lender type, and whether you signed a written agreement), and I can map the likely legal vulnerabilities and what Philippine courts typically do with similar structures.