Legal Interest Rates on Loans in the Philippines

Legal Interest Rates on Loans in the Philippines: An Overview

Interest on loans in the Philippines has evolved through statutes, central bank issuances, and Supreme Court decisions. While the country no longer enforces rigid “usury ceilings” for most loans, various rules and precedents govern how interest rates are fixed, enforced, and limited. Below is a comprehensive discussion of the legal framework surrounding interest rates on loans in the Philippines.

1. Historical Underpinnings: The Usury Law

  1. Act No. 2655 (Usury Law)

    • Enacted in 1916, the Usury Law originally imposed ceilings on interest rates. Through the decades, amendments were passed to adjust permissible rates.
    • Over time, the Monetary Board (the policy-making body of the Bangko Sentral ng Pilipinas, or BSP) was empowered to prescribe maximum interest rates.
    • BSP Circular No. 905 (1982) effectively removed interest ceilings on most loans (except those involving pawnshops and certain other special transactions). This action rendered the Usury Law largely inoperative for common credit transactions. However, the Usury Law was never repealed; it was effectively “dormant” because of the Circular removing ceilings.

  2. Residual Effect

    • Even though the Usury Law was effectively rendered inoperative as far as imposing a maximum interest cap, it remains an overarching reference for policy. Thus, parties still look to the courts to determine if a stipulated rate is so excessive as to be unconscionable.

2. Governing Laws and Regulations

  1. Civil Code of the Philippines

    • The Civil Code (Republic Act No. 386) contains general provisions on obligations and contracts, including stipulations on interest.
    • Article 2209 of the Civil Code provides that if the debtor incurs delay and there is no stipulation for a higher interest, the indemnity for damages (moratory interest) is the legal interest rate. Historically, this was 12% per annum (from prior Central Bank issuances), but that changed with recent jurisprudence and BSP circulars.

  2. Bangko Sentral ng Pilipinas (BSP) Circulars

    • The BSP has authority under the New Central Bank Act (Republic Act No. 7653, as amended) to set the legal rates of interest.
    • BSP Circular No. 799 (2013) drastically changed the legal interest rate for “loans or forbearance of money” and the interest on judgments. It confirmed 6% per annum as the legal interest rate in the absence of a stipulation.

  3. Supreme Court Decisions

    • The Supreme Court has repeatedly clarified that, absent any express contract or law setting the interest rate higher, the applicable rate is 6% per annum—both as compensatory interest (for use of borrowed money) and as moratory interest (damages for delay).
    • A key case often cited is Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013). This decision consolidated earlier rulings (e.g., Eastern Shipping Lines v. CA) and aligned them with BSP Circular No. 799.

3. Stipulated Interest vs. Legal Interest

  1. Freedom to Stipulate Interest Rate

    • Generally, parties in a loan agreement may agree on any interest rate. This is rooted in the principle of autonomy of contracts (Article 1306, Civil Code).
    • However, courts will examine whether the agreed interest rate is unconscionable, in which case a judge can reduce it. For instance, annual rates ranging from 24% to even 60% or higher have, in some cases, been deemed valid, but in others have been struck down or reduced for being “excessive,” “inequitable,” or “shocking to the conscience.”

  2. No Stipulated Rate or Interest on Damages

    • If no rate is expressly provided in a written contract, or if an obligation becomes due and the debtor incurs delay, the applicable legal rate is 6% per annum.
    • This 6% likewise applies to judgment obligations from the time a court decision becomes final and executory.

  3. Judicial Reduction of Interest

    • Even if the parties expressly agree to a high interest rate, courts in the Philippines can invoke equity to reduce an interest rate deemed unconscionable, under Article 1229 of the Civil Code (allowing courts to moderate penal clauses).

4. Interest on Various Types of Obligations

  1. Loans and Forbearance of Money

    • The default legal rate is 6% where no contractual rate is specified.
    • Once a loan is judicially demanded, the court can also impose 6% from the date of demand or from date of judicial complaint until satisfaction.

  2. Judgments

    • Historically, a 12% interest on judgments was applied up to June 30, 2013 (pursuant to earlier BSP issuances). However, after July 1, 2013, the legal interest rate on judgments (or post-judgment interest) was lowered to 6%.

  3. Special Transactions

    • Pawnshops: Interest rates and charges are regulated by the BSP under Pawnshop Regulations (e.g., BSP Circular No. 202, as amended). Pawnshops face specific ceilings on interest and charges.
    • Credit Card Transactions: The BSP issues guidelines for credit card issuers, capping or regulating certain charges and fees. Nonetheless, credit card interest rates can still be relatively high compared to standard bank loan rates; the BSP may periodically impose or adjust caps.

5. Penalties and Other Charges

  1. Penalty Clauses

    • Credit agreements frequently contain clauses imposing a penalty rate or penalty fees for late payments.
    • The Supreme Court has ruled that penalty charges are separate from stipulated interest and can be moderated if they are unconscionable or iniquitous.

  2. Service Charges or Processing Fees

    • Lenders, including banks, may impose various fees (like service charges, attorney’s fees, collection charges). These are generally valid if fully disclosed and agreed upon in writing.
    • However, as with interest rates, the courts can nullify or reduce fees if proven to be excessive or unconscionable.

6. Unconscionable or Excessive Interest

  1. Doctrine of Unconscionability

    • Although there is no fixed cap (due to the Usury Law’s suspension for most transactions), the Supreme Court has repeatedly used equity to strike down or reduce interest rates that are “excessive” or “unconscionable.”
    • There is no hard rule on what exact rate is “unconscionable.” Each case is decided on its facts: the nature of the transaction, the sophistication of the parties, and market conditions may all factor into the analysis.

  2. Illustrative Cases

    • Courts have reduced rates of 60% per annum to 12% or 6%. In other instances, they have upheld rates over 24% or 36% if the borrower fully understood and agreed to such rates and if circumstances indicated that the lender was not taking undue advantage.

7. Enforcement and Remedies

  1. Judicial Action

    • Creditors can file civil cases to collect unpaid loans with stipulated or legal interest.
    • If the interest rate is challenged, the court can determine whether it should be enforced as agreed or modified.

  2. Criminal Liability?

    • Under the current regime, there is generally no criminal punishment merely for charging high interest rates, since the Usury Law’s rigid ceilings are no longer in force.
    • However, if the lender engages in harassment, threats, or other unlawful debt collection practices, separate criminal or administrative liabilities might arise.

  3. Regulatory Oversight

    • The BSP regulates banks, non-bank financial institutions, and pawnshops.
    • Lending companies are supervised by the Securities and Exchange Commission (SEC) under the Lending Company Regulation Act of 2007 (R.A. No. 9474). The SEC can suspend or revoke licenses for abusive lending practices.

8. Practical Considerations for Borrowers and Lenders

  1. Disclosure and Transparency

    • Both parties should ensure that any loan agreement clearly states the interest rate, penalty charges, and any other fees.
    • Full disclosure reduces legal disputes and the risk of having a contract provision declared void for vagueness or unconscionability.

  2. Negotiation of Rates

    • Borrowers should negotiate for lower interest when possible and be mindful of penalty clauses.
    • Lenders should avoid setting overly high rates that could trigger legal challenges.

  3. Documentation

    • Written contracts are paramount. Oral stipulations on interest are difficult to enforce.
    • Courts will look for explicit evidence of the rate agreed upon, typically in the promissory note or loan agreement.

  4. When No Rate Is Specified

    • If the contract is silent on interest, or if the interest stipulation is voided for some reason (e.g., an oral stipulation not reduced to writing), the court will impose the 6% legal interest per annum.

9. Summary of Key Rates and Rules

  1. Default Legal Interest Rate: 6% per annum (BSP Circular No. 799, 2013).
  2. Judgments: 6% per annum from finality of judgment until full satisfaction.
  3. Agreed (Contractual) Rates: Generally allowed, but subject to possible judicial reduction if unconscionable.
  4. Unconscionable Rates: Courts can modify or strike down excessively high rates based on equity.

10. Conclusion

Interest rates on loans in the Philippines operate under a framework that balances contractual freedom with the courts’ authority to prevent “unconscionable” or “excessive” terms. Although the Usury Law has been rendered largely inoperative, the Supreme Court and the BSP set guidelines to protect borrowers and ensure fairness. In the absence of a written stipulation, the legal interest rate is 6% per annum, applying both to obligations due and to final judgments.

Anyone entering into loan agreements—whether as borrower or lender—is advised to:

  • Clearly stipulate the interest rate in writing,
  • Ensure all charges and penalties are transparently explained, and
  • Keep in mind the potential for judicial intervention if rates or penalties are deemed excessive.

As with any legal matter, consulting a qualified attorney is recommended for specific transactions or disputes to ensure full compliance with current rules and jurisprudence.

Disclaimer: This overview is provided for general informational purposes and does not constitute legal advice. For specific questions or concerns regarding interest rates in particular transactions, parties should seek professional legal counsel.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login