Is an 8% Monthly Interest Rate on Debt Legally Permissible in the Philippines?
An In-Depth Legal Discussion

1. Introduction

The matter of charging 8% monthly interest (which translates to 96% per annum) on a debt often provokes the question of whether such a rate is legally permissible in the Philippines. Although Philippine usury laws previously placed strict caps on interest rates, reforms and jurisprudence have significantly changed the landscape. In essence, there is no hard-and-fast statutory limit on interest rates anymore, but that does not automatically render any stipulated rate valid. Courts retain the power to reduce or nullify “unconscionable” interest rates.

This article provides an in-depth legal discussion on:

The historical and current legal framework governing interest rates in the Philippines.
Key jurisprudence on unconscionable interest rates.
Practical implications of charging (or being charged) an 8% monthly interest rate.
Guidelines and cautionary advice for creditors and debtors alike.

2. Historical Overview: The Usury Law and Its Relaxation

Act No. 2655 (The Usury Law)
- Enacted in 1916, the Usury Law once provided strict ceilings for interest rates. Violation of these ceilings was considered a criminal offense.
- Over time, the Usury Law was amended several times to adjust maximum permissible rates, reflecting economic realities.
Central Bank (CB) Circular No. 905 (1982)
- Issued by the Monetary Board of the then Central Bank of the Philippines (now Bangko Sentral ng Pilipinas or BSP).
- Effectively “lifted” or “removed” the ceilings on interest rates set by the Usury Law. While the Usury Law itself was not repealed, its interest ceilings became inoperative.
- This development led many to assume that “there is no more usury in the Philippines,” meaning private lenders are, in theory, free to stipulate any interest rate.
Contemporary Framework
- Despite the removal of statutory caps, Philippine courts have repeatedly exercised the power to strike down or reduce interest rates deemed unconscionable or excessive.
- In other words, while there is no longer a hard statutory maximum, the freedom to stipulate interest rates is tempered by principles of equity, public policy, morals, and fairness under the Civil Code.

3. The Principle of Unconscionability

3.1. Legal Basis for Moderating Excessive Interest

Article 1306 of the Civil Code: Provides that “[t]he contracting parties may establish such stipulations… as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”
Article 1229 of the Civil Code: Allows courts to reduce penalty clauses or interest rates if they are found “iniquitous or unconscionable.”
Judicial Power: The Supreme Court of the Philippines has consistently ruled that while freedom of contract is vital, it is not absolute; public welfare and equity considerations can override the parties’ agreement when the interest rate is “excessive” or “unconscionable.”

3.2. Relevant Supreme Court Decisions

Numerous Supreme Court rulings illustrate how the courts have dealt with exorbitant interest rates:

Medel vs. Court of Appeals (G.R. No. 131622, November 27, 1998)
- The Court reduced the stipulated interest rate of 5.5% per month (66% per annum) to 1% per month (12% per annum).
- Held that interest rates found to be “excessive, iniquitous, exorbitant or unconscionable” are contrary to morals and the law.
Spouses Solangon vs. Salazar (G.R. No. 125944, November 27, 2000)
- Reiterated that courts can reduce excessive interest rates in the interest of justice and equity.
Ching vs. Ching (G.R. No. 165879, January 27, 2006)
- Again stressed that although the law no longer imposes a strict ceiling, an interest rate may still be declared void for being unconscionable.

These cases, among many others, underscore a consistent judicial stance: even if no specific law prohibits an ultra-high rate, courts may nonetheless nullify or reduce it when it offends equity and public policy.

4. 8% Monthly Interest Rate: Key Considerations

Mathematical Perspective
- 8% monthly is equivalent to 96% per annum if simply multiplied by 12.
- Even higher if the terms compound monthly.
Likely View of Courts
- While not “illegal” per se in a statutory sense (no exact ceiling mandated by law), Philippine courts have repeatedly declared monthly rates of even 3–5% as “excessive” or “unconscionable.”
- Given this trend, 8% monthly (96% annual) stands on very shaky legal ground. It is highly probable that a court, if petitioned, would moderate or invalidate such a rate.
Freedom to Contract vs. Equity
- Parties are free to agree to an 8% monthly interest rate in principle, but that agreement is always subject to judicial scrutiny.
- If litigation arises, the debtor can raise the issue of unconscionability, and courts often reduce the rate to a level they deem just and fair (commonly between 12% to 24% per annum, depending on the facts and circumstances).
Practical Risk
- For lenders: Charging such a high rate can lead to potential legal challenges. Even if a lender obtains a signed contract, a judge may later reduce the collectible interest.
- For borrowers: Agreeing to an extremely high rate without the means to pay risks ballooning debt and protracted legal disputes.

5. Applicable Laws and Regulations

Civil Code Provisions
- As mentioned, Articles 1306 and 1229 provide the basis for courts to interfere with excessive stipulations.
Bangko Sentral ng Pilipinas (BSP) Circulars
- BSP Circular No. 905 (1982) removed interest ceilings set by the old Usury Law.
- Subsequent BSP regulations are more focused on financial institution operations and consumer protection than on setting maximum interest rates for private loans.
Consumer Protection Laws
- For loans extended by financing companies or under consumer credit transactions, the lender must comply with disclosure requirements under the Truth in Lending Act (Republic Act No. 3765).
- While the Truth in Lending Act does not cap interest rates, it does require clear disclosure of finance charges and annual percentage rates to protect consumers from hidden or deceptive charges.

6. Potential Consequences and Remedies

Judicial Intervention
- A borrower who believes a stipulated interest rate is unconscionable may seek relief in court. The court can:
  - Declare the entire interest provision void.
  - Reduce the agreed interest to a reasonable rate.
  - Order the lender to refund excessive amounts already collected.
Settlement and Renegotiation
- In practice, lenders and borrowers often prefer out-of-court settlements or renegotiations. Faced with the risk of having an interest rate stricken down, creditors may agree to reduce the rate voluntarily.
Criminal Liability?
- Under the old Usury Law, violators could face criminal sanctions. However, due to the relaxation of the law by BSP Circulars, the focus has shifted away from criminal liability to the notion of unconscionability.
- Today, charges of estafa (swindling) or other criminal offenses generally arise only when there is fraud or deceit, rather than merely the imposition of high interest.

7. Practical Guidelines and Best Practices

For Lenders
- Disclose all charges clearly and highlight the effective annual interest rate (especially for monthly compounding).
- While there is no statutory maximum, aim for rates that are within common commercial standards (e.g., between 12–36% per annum for high-risk lending).
- Keep in mind the possibility that courts may invalidate or reduce steep interest clauses.
For Borrowers
- Read and understand all loan provisions before signing.
- If faced with an extremely high rate, attempt to negotiate.
- If you have already entered into a contract with a high rate and default looms, consider consulting a lawyer or seeking a settlement that lowers the interest rate.
Documentation and Record-Keeping
- Maintain complete records of all loan transactions, payments, and correspondences.
- In any dispute, documented evidence can heavily influence the court’s decision.
Consult Legal Counsel Early
- Both parties benefit from obtaining legal advice before finalizing any loan agreement with unusual or high interest rates.
- Preventive legal consultation can avert costly litigation and ensure compliance with consumer protection and disclosure laws.

8. Conclusion

Is an 8% monthly interest rate on debt legally permissible in the Philippines?

Strictly speaking, there is no longer a statutory cap that outright prohibits an 8% monthly rate due to the relaxation of the Usury Law via BSP Circular No. 905.
However, courts have consistently declared excessively high rates to be unconscionable and will reduce them in the interest of fairness. Philippine jurisprudence shows that monthly rates far lower than 8% have already been struck down or lowered by the courts.

Consequently, while lenders and borrowers remain free to set interest rates, they must recognize that the law empowers courts to moderate or nullify exorbitant stipulations. The safest course is to adopt reasonable interest rates aligned with commercial norms, ensuring transparency and fairness in all lending transactions.

Disclaimer: This article is for general informational purposes only and is not legal advice. Specific cases can vary, and laws or regulations may change. For questions regarding a particular situation, it is advisable to consult a qualified attorney in the Philippines.