Disclaimer: The following discussion is for general informational purposes only and does not constitute legal advice. For guidance concerning specific situations, please consult a qualified attorney in the Philippines.

Overview

In the Philippines, charging interest on loans or other credit accommodations is governed by a combination of statute (notably the Usury Law, as amended), regulations issued by the Bangko Sentral ng Pilipinas (BSP), and Supreme Court jurisprudence. While the traditional Usury Law prescribed maximum interest rates, much of it has effectively been rendered inoperative by subsequent laws and regulations. In practice, Philippine courts now focus more on whether an agreed interest rate is unconscionable or excessive rather than whether it violates a strict legal cap.

An 8% monthly interest rate (which translates to 96% per annum, excluding compounding) is generally considered extremely high in the Philippines. Although no law sets a hard ceiling, Philippine courts have struck down rates that they deem unconscionable. This article explores the legal framework for interest rates in the Philippines, the relevance of the Usury Law, jurisprudential guidelines on when courts reduce or invalidate agreed interest, and how these principles might apply to an 8% monthly rate.

1. Historical Background: Usury Law

1.1. Original Limits Under Act No. 2655

The Usury Law (Act No. 2655), enacted during the American colonial period, imposed various ceilings on interest rates in the Philippines.
At different times, the maximum rate was adjusted—often around 12% per annum for secured loans and 14% for unsecured loans—subject to change by executive issuance.

1.2. Presidential Decrees and BSP Circulars

Over time, Presidential Decrees (notably Presidential Decree No. 116) authorized the Monetary Board of the Bangko Sentral ng Pilipinas (formerly Central Bank of the Philippines) to prescribe maximum interest rates.
In the 1980s and 1990s, through various circulars (including Central Bank Circular No. 905, series of 1982), the government effectively removed ceilings on interest rates by “lifting the rate of interest” or suspending specific maximum rates.
This effectively made the interest-rate ceiling provisions of the Usury Law inoperative, although the Usury Law itself was never formally repealed.

1.3. Present Regulatory Stance

The current approach is that parties are largely free to stipulate the rate of interest in their agreements, subject to the possibility that courts may declare the rate void or unconscionable if it is clearly excessive.

2. Court Treatment of High Interest Rates

2.1. The Concept of “Unconscionable” or “Excessive” Rates

Even though ceilings are no longer strictly imposed by law or BSP circulars, the Supreme Court of the Philippines has consistently ruled that parties’ freedom to contract is not absolute.
Courts review whether an interest rate is “unconscionable” or “excessive.” When found to be so, courts can reduce the rate to a more reasonable amount.

2.2. Key Supreme Court Decisions

Medel v. Court of Appeals (353 SCRA 636 (2001))
- The Supreme Court nullified an interest stipulation that was deemed excessive and reduced the rate to a more reasonable figure.
- The Court emphasized that while there is no precise statutory cap, usurious or unconscionably high rates are contrary to morals, if not the law.
Reyes v. Court of Appeals (GR No. 118671, 2000)
- Interest rates of 5.5% monthly (66% annually) were deemed unconscionable and reduced accordingly.
- This case is frequently cited when the courts reconfigure interest rates.
Spouses Almeda v. Court of Appeals
- In several iterations of Almeda-related rulings, the Supreme Court reduced monthly interest rates ranging from 5% to 6% to a more modest level (e.g., around 12-24% per annum).
- The Court noted that interests above 60% per annum tend to be classified as “iniquitous” or “unconscionable.”

2.3. Rationale for Reducing Unconscionable Rates

High interest rates, especially in informal lending settings, can lead to undue hardship or can be the result of unequal bargaining power.
Article 1229 of the Civil Code of the Philippines empowers courts to reduce a penalty (or by analogy, an interest stipulation) that is iniquitous or unconscionable.
While parties’ freedom to contract is recognized, courts maintain an equitable power to prevent unjust enrichment or exploitation.

3. The Specific Question of 8% Monthly (96% Annually)

3.1. No Automatic “Illegality,” But Highly Vulnerable to Challenge

Because the Usury Law interest ceilings are essentially suspended, 8% monthly is not automatically deemed “illegal” by virtue of a statutory cap.
However, in light of existing jurisprudence, 8% per month (96% per annum) has frequently been ruled by Philippine courts as unconscionable.

3.2. Likely Judicial Outcomes

If a creditor charges 8% monthly interest and the debtor challenges it in court, there is a strong probability the court will reduce the rate to a level considered equitable.
Commonly, courts might reconfigure such excessive rates to 12% per annum (legal rate in some contexts before 2013) or 6% per annum (prevailing legal interest rate in certain contexts after BSP Circular 799 in 2013), depending on the circumstances and the date of the filing of the complaint or other factors.
In some decisions, the reformed rate is set at 24% per annum (2% monthly) if the parties originally agreed to a monthly scheme but it is still moderated by the court.

3.3. Factors That Courts Consider

Nature of the Transaction
- Whether it is a simple loan between private individuals or part of a regulated lending business.
Circumstances at the Time of Contract
- Whether there was coercion, deception, or other vices of consent.
- If the borrower was in dire need or was presented with a “take it or leave it” scenario.
Industry Standards or Prevailing Market Rates
- Courts look to more common lending rates in the market or from banking institutions as a comparative reference.
Good Faith of the Parties
- Whether the lender or borrower engaged in unfair dealing.

4. Practical Implications for Lenders and Borrowers

4.1. For Lenders

While lenders may attempt to justify higher rates to offset risk, charging 8% monthly (96% annually) exposes them to a strong possibility of the rate being slashed by the courts.
If a borrower defaults and litigation arises, lenders relying on excessive stipulations risk not only the disapproval of the full interest but also potential litigation costs and a significantly reduced effective interest rate.

4.2. For Borrowers

If a borrower signs a contract with 8% monthly interest and later struggles to repay, they may seek judicial intervention to have the rate declared unconscionable.
However, it is also crucial for borrowers to remember that simply signing a contract with a high rate does not automatically render the obligation void—they will still owe principal and any lawful interest the court deems justified.

5. Recommendations and Best Practices

Put All Agreements in Writing
- Under Article 1956 of the Civil Code, interest cannot be charged unless it is expressly stipulated in writing.
Negotiate Reasonable Rates
- Parties should aim for an interest rate aligned with market norms, often in the single digits per annum for typical secured loans.
- Going into double-digit monthly interest rates (like 8%) invites legal risk.
Seek Legal Counsel Before Enforcement
- Lenders who plan to charge rates above standard banking rates should obtain legal advice to gauge if courts might find the rate unreasonable.
- Borrowers who believe they have been overcharged are advised to consult counsel before filing a case, to avoid unnecessary costs.
Maintain Transparency
- Full disclosure of the effective annual rate (EAR) or annual percentage rate (APR) fosters fairness and can prevent disputes about hidden fees or compounding.

6. Conclusion

While the Philippines no longer enforces a hard cap on interest rates due to the suspension of certain provisions of the Usury Law, charging 8% monthly interest (96% per annum) is highly susceptible to being declared unconscionable. Philippine courts consistently emphasize that although freedom of contract is respected, it cannot be invoked to enforce blatantly excessive or inequitable interest stipulations.

Key Takeaway: An 8% monthly rate is not automatically “illegal” under a strict usury law framework, but in practice, it often fails court scrutiny. Should a dispute arise, courts generally reduce such rates to something closer to conventional levels—usually ranging from 12% to 24% per year, or even 6% per annum in some scenarios, depending on the circumstances and the timing of the loan agreement. Both lenders and borrowers are thus encouraged to negotiate rates responsibly and document agreements clearly.

Disclaimer Reiterated: The discussion above is for informational purposes. Do not rely on it as legal advice. Philippine laws and jurisprudence may evolve, and your specific circumstances may require tailored legal counsel. If you need clarification or face litigation involving high interest rates, consult a qualified attorney in the Philippines.