Legal Limits on Online Lending Interest Rates in the Philippines: A Comprehensive Overview

The rise of digital platforms and mobile applications for lending, commonly referred to as “online lending,” has significantly changed the Philippine lending landscape. These technologies have enabled borrowers to obtain loans with just a few taps on a smartphone—offering speed and convenience that traditional banks cannot always match. However, the challenge for both policymakers and consumers lies in ensuring that these online lenders adhere to fair and lawful interest rate practices.

This article aims to provide a comprehensive discussion of the laws, regulations, and jurisprudence affecting online lending interest rates in the Philippines. While this serves as an overview, it is always best to consult legal counsel for specific concerns or litigation strategy.

1. Historical Context: From Usury Law to the Present

1.1. The Old Usury Law

Act No. 2655 (Usury Law) was enacted in the early 20th century, setting strict limits on interest rates that could legally be imposed on loans.
Over time, economic conditions changed, and the ceilings established under the Usury Law were deemed too restrictive.

1.2. Central Bank Circular No. 905 (1982)

In 1982, through Central Bank (now Bangko Sentral ng Pilipinas, “BSP”) Circular No. 905, the Usury Law’s prescribed ceilings were effectively suspended, allowing parties to contractually agree on any interest rate.
Despite the suspension of usury ceilings, Philippine courts have equitable discretion to reduce excessive or unconscionable interest rates.

1.3. Supreme Court Jurisprudence

The Supreme Court has repeatedly emphasized that while the Usury Law ceilings are lifted, interest rates must not be “unconscionable.”
Courts have, on many occasions, reduced interest rates deemed excessive—such as those reaching 36% per month or even higher—on the ground of public policy and fairness. Examples of key cases include:
- Medel v. Court of Appeals (1998) – The Supreme Court reduced an interest rate of 5.5% per month (66% per year) as excessive.
- Florendo v. Rural Bank of Malasiqui (2016) – Reinforced the principle that courts have the power to nullify or reduce unreasonably high interest rates.

These judicial precedents play a significant role in protecting borrowers against predatory rates, even in the absence of a specific statutory cap.

2. The Lending Company Regulation Act of 2007 (R.A. 9474)

The Lending Company Regulation Act (Republic Act No. 9474) was introduced to regulate lending companies, including online lenders. Key highlights:

Registration and License Requirements
- All lending companies (including those operating purely online) must register with the Securities and Exchange Commission (SEC).
- They must secure a Certificate of Authority to Operate as a Lending Company (CA) from the SEC.
Interest Rates and Charges
- While R.A. 9474 does not set a blanket ceiling on interest rates, it authorizes the SEC to set or impose limits on the rates and other charges as circumstances warrant.
- The law underscores that all financing charges should be “reasonable and just,” although no uniform statutory cap is prescribed.
Disclosure Requirements
- Lending companies must provide borrowers with clear statements of the loan principal, rates, charges, penalties, and other terms prior to consummation of the loan.
Penalties for Violations
- Operating without the requisite SEC registration and authority can result in fines, penalties, and closure orders.

3. SEC Issuances and Regulations on Online Lending

3.1. SEC Memorandum Circular No. 18 (2019)

Primarily addressed the proliferation of online lending applications (often labeled as “fintech” or “digital lending**” apps) that lacked transparency and compliance with SEC requirements.
Required such entities to register and secure the appropriate license from the SEC.
Stipulated more stringent disclosure rules regarding interest rates, fees, and penalties.

3.2. SEC Actions to Curb Abuses

The SEC has cracked down on online lenders engaged in harassment and shaming of borrowers (such as contacting friends and relatives of debtors via phone or social media).
In several instances, it has revoked licenses or halted operations of digital lending companies found to be violating R.A. 9474 and other related rules.
The SEC has emphasized that while no rigid numerical interest cap is imposed across the board, lenders found imposing “clearly unfair or excessive” rates or fees may be subject to sanctions.

4. BSP Regulations and Oversight

4.1. BSP’s Role

The BSP primarily regulates banks, quasi-banks, and other BSP-supervised financial institutions. Many online lending platforms operate as non-bank lenders, so direct BSP oversight may not apply—unless they partner with a BSP-supervised institution.
Nevertheless, the BSP remains influential by issuing policies on financial consumer protection and general interest rate guidelines.

4.2. Financial Consumer Protection Act (R.A. 11765)

Enacted in 2022, the Financial Consumer Protection Act strengthened the regulatory powers of the BSP, the SEC, and the Insurance Commission to ensure consumer welfare.
With the BFS, SEC, and IC collectively adopting rules on consumer protection, online lenders are expected to comply with fair lending practices, including transparent disclosure of rates and charges.

5. Setting De Facto Interest Rate Limits Through Case Law

5.1. “Unconscionable” Interest Defined

Courts look at the circumstances of each case to determine unconscionability. Factors include:
1. Market conditions and prevailing interest rates in the financial sector.
2. The borrower’s bargaining power and sophistication.
3. The lender’s justification (if any) for imposing high rates.
While there is no hard-and-fast legal maximum (due to the suspension of the Usury Law), the higher the interest, the likelier it is for a court to consider reducing it.

5.2. Penalties, Surcharges, and Fees

If the penalty or late payment fee is deemed exorbitant, courts may also reduce it.
Although lenders often attempt to separate “penalty charges” from interest, both may be subject to scrutiny.

6. Practical Considerations for Online Lending Interest Rates

Comparative Benchmark
- Traditional bank personal loans typically have annual interest rates ranging anywhere from 10% to 25%, depending on the borrower’s creditworthiness.
- Many online lenders may charge monthly or even weekly interest, sometimes translating into annual percentages that exceed 60% or more.
Transparency Obligations
- Under the Lending Company Regulation Act and SEC issuances, digital lenders must clearly state their interest rates, processing fees, penalties, and other charges in their loan agreements and platforms.
Short-Term vs. Long-Term Loans
- Online lending platforms typically provide short-term or payday loans, which often carry higher nominal monthly rates. When annualized, these can become extremely high. Borrowers need to evaluate the effective annual percentage rate (APR).
Borrower Recourse
- If borrowers believe the rates charged or the collection methods used are unlawful, they can:
  - File complaints with the SEC (for violations of R.A. 9474 or SEC regulations).
  - File cases in court to have the interest rate declared usurious (arguing unconscionability, even though there is no strict statutory cap).
  - Seek help from consumer protection bodies (such as the BSP’s Financial Consumer Protection Department if the lender is a bank or quasi-bank, or the SEC if it is a lending company).
Penalties for Non-Compliance
- Online lending companies operating illegally or imposing excessive rates could face:
  - Fines and revocation of certificates of authority.
  - Potential criminal or administrative penalties for harassment or data privacy breaches.

7. Emerging Trends and Possible Reforms

Push for Interest Rate Caps
- Some consumer groups and legislators advocate for a more concrete interest rate cap for non-bank lenders, especially those operating online. Various proposals seek to align caps with rates applied to microfinance institutions or to set a fixed maximum of 1%–2% per month.
Tighter Monitoring of Fintech Platforms
- As online lenders employ sophisticated digital channels (including “buy now, pay later” schemes), regulators face the challenge of modernizing oversight and imposing uniform consumer protection standards.
Stricter Data Privacy Enforcement
- Online lenders often collect extensive personal data from borrowers—sometimes accessing phone contacts or media files. The National Privacy Commission (NPC) has begun enforcing data privacy rules more aggressively, and lenders who misuse personal information for collection or harassment risk heavy fines and closure.
Financial Inclusion vs. Consumer Protection
- One tension in policy-making is ensuring financial inclusion—giving access to credit to the underbanked—while preventing predatory interest rates. Future regulations may reflect a balancing act: encouraging innovation in lending while imposing clearer consumer protection rules.

8. Conclusion

In the Philippines, online lending interest rates operate under a regulatory environment that (1) does not specify a strict numerical maximum, but (2) upholds the principle that rates must not be excessive or unconscionable. The Lending Company Regulation Act of 2007 provides the core framework, while the SEC enforces compliance through issuances and oversight. In parallel, the BSP wields considerable influence over overall financial consumer protection standards, and the courts remain the final arbiter of unconscionable contracts.

For borrowers:

Always check the registration and license status of the lending company with the SEC.
Carefully review the annualized cost (APR) of any short-term or “per month” rate quoted by online lenders.
Know that there is legal recourse if interest, penalties, or collection practices become abusive.

For online lending companies:

Ensure full compliance with licensing and disclosure requirements.
Avoid harassment and illegal collection methods that can lead to SEC sanctions.
Maintain transparent and fair interest rates, mindful that courts can and do reduce excessive rates.

With continued technological advances and shifting regulatory policies, it is likely that the Philippine legal regime governing online lending will continue to evolve. Nonetheless, the guiding principle remains clear: consumer protection must be balanced with accessible, innovative lending solutions. Anyone engaged in online lending—whether as a provider or a borrower—should keep abreast of SEC directives, relevant BSP regulations, and evolving court rulings to stay on the right side of the law.