Guide to Usury Laws and Interest Rate Limits in the Philippines

Disclaimer: This guide is intended for general informational purposes only and does not constitute legal advice. For specific concerns and questions, you should consult a qualified attorney or legal professional.

1. Introduction

In the Philippines, the concept of “usury” pertains to charging excessive or unconscionable interest on loans. Historically, the Philippines had strict usury laws that capped interest rates, but subsequent legal developments and monetary regulations have effectively removed explicit interest rate ceilings. Nevertheless, Philippine courts still intervene when interest rates are deemed unconscionable, and certain rules and jurisprudence govern the imposition of interest. This guide provides an overview of the legal framework, key statutes, and court decisions regarding usury laws and interest rate limits in the Philippines.

2. Historical Background: The Usury Law (Act No. 2655)

Enactment of the Usury Law
- The primary law governing interest rates in the Philippines used to be Act No. 2655, commonly referred to as the Usury Law, enacted in 1916.
- Over time, this law was amended to set various interest rate ceilings for different types of loans.
Amendments and Modifications
- From its original enactment, the Usury Law was amended several times, adjusting the statutory ceilings on interest rates that could be charged.
- Eventually, Presidential Decree (P.D.) No. 116 and other decrees delegated authority to the Monetary Board of the then Central Bank of the Philippines (now Bangko Sentral ng Pilipinas, or BSP) to prescribe the maximum interest rates.
Suspension of the Usury Law Ceilings
- Central Bank Circular No. 905 (Series of 1982) effectively lifted the ceilings imposed by the Usury Law by stating that the interest rate ceilings under Act No. 2655 were no longer in force.
- As a result, while the Usury Law was never formally repealed, its effectivity in setting strict maximum interest rates was suspended.
- This gave banks and lending institutions significant leeway in determining rates, subject to general principles of law and oversight by the Monetary Board.

3. Current Legal Framework on Interest Rates

3.1 Role of the Bangko Sentral ng Pilipinas (BSP)

Under Republic Act No. 7653 (The New Central Bank Act, later amended by R.A. 11211), the BSP has broad powers to supervise and regulate banks and non-bank financial institutions, including issuing rules related to interest rates.
The BSP primarily allows lending institutions to set interest rates based on market forces but monitors them through regulations, consumer protection mechanisms, and reporting requirements.
For specific sectors (e.g., microfinance, rural banks), the BSP may issue circulars and guidelines that indirectly influence or set recommended caps on interest charges.

3.2 Freedom of Contract and Limitations

Civil Code Provisions
- Philippine law, particularly Article 1306 of the Civil Code, gives contracting parties the freedom to stipulate the terms of their contract, including interest rates, as long as they are not contrary to law, morals, public order, or public policy.
- Article 2209 of the Civil Code also provides that when an obligation (like a loan) does not specify an interest rate, the legal interest rate shall apply.
Legal Interest Rate vs. Contractual Interest Rate
- If a written agreement specifies an interest rate, that stipulated rate generally governs.
- If there is no stipulation or the stipulation is void, the legal interest rate applies. The legal interest rate has evolved through jurisprudence (notably in Nacar v. Gallery Frames, G.R. No. 189871, 2013) and currently stands at 6% per annum for most obligations (both compensatory and moratory interest).
Unconscionable or Iniquitous Rates
- Even though parties are free to set interest rates, courts have consistently ruled that they can strike down or reduce unconscionable, iniquitous, or excessive interest rates.
- The Supreme Court has, in several decisions, lowered stipulated interest rates that it deemed “exorbitant” (e.g., 3% to 5% per month, or 36% to 60% per annum) to a more reasonable level, often pegging it at 12% or 6% per annum, depending on the circumstances and prevailing jurisprudence at the time of the decision.

4. Key Jurisprudential Doctrines

4.1 Principle of Unconscionability

Philippine courts have recognized that although there is no longer a strict statutory ceiling, an interest rate may still be invalid if it is unconscionable.
Examples of court rulings:
- In some cases, rates of 3% per month (36% per annum) were struck down as excessive.
- In others, if there was a clear agreement and the lender provided proof of the borrower’s informed consent, the same 36% per annum interest rate could be upheld if the court found it was not “shocking to the conscience” under the specific facts.

4.2 Judicial Reduction of Interest Rates

The Supreme Court has repeatedly stated that it has the power to reduce the interest rate to the legal interest rate when it finds a stipulation to be iniquitous or contrary to morals.
The authority to reduce does not entirely void the interest rate provision but adjusts it to a level deemed just and equitable.

4.3 Nacar vs. Gallery Frames Doctrine (2013)

This landmark decision clarified that, absent a stipulation of interest rate:
1. The legal interest rate for loans or forbearance of money is 6% per annum.
2. For judgments awarding monetary sums, a rate of 6% per annum will apply from finality of judgment until satisfaction.
This ruling effectively updated previous rulings that applied 12% per annum as legal interest for certain monetary obligations prior to July 1, 2013.

5. Practical Implications

Banking and Lending Institutions
- Most banks and registered lending companies in the Philippines set rates based on market forces, BSP guidelines, and competitiveness.
- They are also guided by BSP’s consumer protection regulations, particularly on transparency of loan terms (e.g., disclosure of effective interest rate, fees, and charges).
Private Lending Arrangements
- Private or “informal” lenders (e.g., “5-6” lenders) may charge higher interest rates that can become the subject of litigation if challenged in court.
- Borrowers can invoke the principle of unconscionability and request judicial intervention to lower the rates.
Documentation and Disclosure
- To avoid future disputes, it is crucial that lending agreements clearly specify the interest rate (either annual, monthly, or daily) and all associated fees.
- Borrowers should be fully informed, in writing and in a language they understand, about how interest will be computed and compounded.
Penalties and Additional Charges
- Apart from interest, some lenders impose penalties for late payment or defaults. Courts may also strike down or reduce these penalties if they are deemed excessive and not consistent with the principle of fairness under Philippine law.

6. Enforcement and Remedies

Filing a Civil Action
- If a borrower believes that the interest rate in a loan contract is illegal or unconscionable, they may file a civil action for reformation or nullification of the interest clause. The court can reduce or invalidate the interest rate as it sees equitable.
Criminal Liability
- Strict criminal liability under the old Usury Law has become less relevant because the law’s ceilings were effectively suspended. However, if there are other violations—such as estafa (swindling) or harassment by the lender—these can be pursued under the Revised Penal Code or special laws.
BSP Complaint or Regulatory Action
- For bank loans or transactions with regulated lending companies, complaints can be lodged with the BSP or the Securities and Exchange Commission (SEC) if there are violations of banking or lending regulations, such as failure to disclose effective interest rates, misrepresentation, or unfair collection practices.

7. Tips and Best Practices

For Borrowers
- Always review the terms of the loan agreement carefully. Check if the interest rate is stated clearly (annual vs. monthly), and ask the lender for the Effective Interest Rate (EIR).
- If a rate feels excessively high, attempt to negotiate or consult a lawyer before signing.
For Lenders
- Maintain transparent and fair lending practices. Clearly disclose all charges, fees, and interest computations.
- Avoid imposing “blanket” or “catch-all” penalty clauses. These may be struck down in court as excessive.
Documentation is Key
- Properly document the loan agreement. Ensure both parties sign it and acknowledge the interest rate, payment schedule, and default penalties.
- Keep communication records and official receipts for all payments.
Legal Advice
- If in doubt, especially for larger transactions, consult legal counsel to ensure the interest rate and other provisions in the loan agreement comply with current laws and jurisprudence.

8. Conclusion

While the Usury Law (Act No. 2655) historically set strict interest rate ceilings in the Philippines, its practical effect has been suspended. Today, lenders and borrowers generally rely on freedom of contract—subject to the watchful eye of the courts, which can void or reduce rates deemed unconscionable. The legal interest rate for obligations without a stipulated rate is 6% per annum, following the Supreme Court’s guidance in Nacar v. Gallery Frames.

In practice, the Bangko Sentral ng Pilipinas regulates lending institutions through various circulars and consumer protection mechanisms. Nevertheless, vigilance is advised for both borrowers and lenders. Fair dealing, transparency, and careful documentation help ensure that the interest rate in any loan agreement remains within acceptable bounds. If a dispute arises, Philippine courts stand ready to apply equitable principles to protect against oppressive financing practices.

References and Further Reading:

Act No. 2655 (The Usury Law), as amended
Central Bank Circular No. 905 (Series of 1982)
Republic Act No. 7653 (The New Central Bank Act), as amended by R.A. 11211
Nacar v. Gallery Frames, G.R. No. 189871 (2013)
Civil Code of the Philippines, particularly Articles 1306 and 2209
Various Supreme Court rulings on unconscionable interest rates

For up-to-date regulations, always check the Bangko Sentral ng Pilipinas (BSP) website and consult with a qualified attorney for any specific legal advice.