Below is an extensive discussion of the legality of excessive interest charges on small debts in the Philippines. This article covers the historical context, governing laws and regulations, landmark jurisprudence, and practical implications for both creditors and debtors. Please note that while this overview aims to be comprehensive, it does not constitute formal legal advice. For specific concerns or cases, consulting a qualified lawyer is advised.

I. Introduction

In the Philippines, charging interest on loans or credit is a common practice—whether through formal financial institutions or informal moneylenders. While parties are generally free to stipulate an agreed-upon rate, there are legal limits to prevent exploitation, especially for small debts. Philippine courts have consistently held that interest rates deemed “unconscionable” or “excessive” may be nullified or reduced on grounds of public policy and equity.

II. Historical and Legal Framework

A. The Old Usury Law (Act No. 2655)

Original Interest Ceilings
- Enacted during the American colonial period, Act No. 2655 (commonly known as the Usury Law) set strict maximum interest rates.
- These statutory ceilings varied over time, but initially, the law capped interest for simple loans, often at 12% per annum or lower, depending on the type of loan or transaction.
Suspension of Interest Rate Ceilings
- In 1982, the Central Bank (now Bangko Sentral ng Pilipinas, or BSP) issued Central Bank Circular No. 905, which effectively removed the interest rate ceilings stipulated by the Usury Law.
- Although the Usury Law itself was not repealed, the strict caps were suspended. Thus, the law remained on the books, but without enforceable interest ceilings.

B. Freedom to Stipulate Interest vs. Prohibition on Unconscionable Rates

Article 1306 of the Civil Code
- Allows parties to establish agreements provided they are “not contrary to law, morals, good customs, public order, or public policy.”
- This principle supports contractual freedom for stipulating interest rates but also sets the boundary that terms must not violate fundamental notions of fairness.
Legal Rate of Interest (Civil Code and BSP Circulars)
- In the absence of a stipulated rate, the legal interest—traditionally 6% or 12%—applies.
- BSP Circular No. 799 (2013) and the Supreme Court decision in Nacar v. Gallery Frames (2013) set the legal interest at 6% per annum for monetary judgments.
Truth in Lending Act (R.A. 3765)
- Requires lenders to disclose fully the finance charges and effective interest rates on loans.
- While it does not cap interest rates, it promotes transparency and helps consumers understand the true cost of borrowing.

C. Regulatory Bodies and Special Regulations

Bangko Sentral ng Pilipinas (BSP)
- Regulates banks and certain financial institutions.
- Issues circulars that set guidelines for interest charges, disclosure, and consumer protection measures.
- For example, the BSP has placed caps on credit card interest rates in recent years, but these do not universally apply to all small loans from informal or non-bank lenders.
Securities and Exchange Commission (SEC)
- Oversees lending companies registered under the Lending Company Regulation Act (R.A. 9474) and Financing Company Act (R.A. 8556).
- Works in tandem with BSP on consumer protection but does not impose a blanket interest ceiling for all lenders.
Microfinance Institutions
- Often work under specific guidelines to ensure sustainability yet protect small borrowers from predatory terms.
- While microfinance interest rates can be high to cover administrative costs, regulatory and donor-driven best practices advocate transparent and fair pricing.

III. Supreme Court Jurisprudence on Excessive Interest

Philippine courts have consistently struck down or reduced interest rates they consider “unconscionable,” “iniquitous,” or “excessive.” Below are some key principles drawn from Supreme Court decisions:

Freedom of Contract is Not Absolute
- In Medel v. Court of Appeals (G.R. No. 131622, November 27, 1998), the Supreme Court found that a stipulated interest rate of 66% per annum was excessive. The Court reduced it to a more reasonable rate in line with prevailing jurisprudence.
- Courts consider factors such as the circumstances of the loan, economic realities, and the relationship between the parties.
Unconscionable Rates are Contrary to Public Policy
- Even after the suspension of the Usury Law’s interest ceilings, courts can strike down rates that are “shocking to the conscience.”
- In some cases, the Court has reduced 48% or higher annual interest rates to 12% or 6%, applying equity.
In Dubious Situations, Courts Favor the Debtor
- Philippine courts often read contractual ambiguities in favor of the weaker party, especially in small, short-term loans.
- If the creditor fails to comply with disclosure requirements, or if there is any evidence of fraud or undue influence, the stipulated interest may be invalidated.
Penalty vs. Interest
- Courts also evaluate whether the stipulated charge is an interest rate or a penalty. Excessive penalties or combined interest and penalty rates can be similarly reduced if deemed excessive.

IV. Practical Implications for Small Debts

5-6 Lending
- An informal practice where lenders charge 20% interest over a short period (often daily or weekly).
- Although not per se “criminal” purely on interest rate grounds, such practices frequently involve unregistered lending, lack of disclosure, and exploitative collection methods. Courts often reduce the effective interest rate if litigation ensues.
Short-Term Online Lending Apps
- Rapidly growing in the Philippines, many charge high processing fees or “service charges” that essentially function as high-interest rates.
- Borrowers are protected by data privacy regulations and the requirement for fair collection practices, but interest caps remain governed by general principles of unconscionability.
Potential Criminal Liability
- Excessive interest alone is typically handled through civil, not criminal, remedies.
- However, harassment, threats, or other illegal collection practices can lead to criminal charges for lenders, especially if they violate the Fair Debt Collection Practices or relevant penal laws (e.g., unjust vexation, grave threats, or libel for defamatory postings).
Legal Remedies for Debtors
- Filing a civil complaint to declare the interest unconscionable. Courts may order a recomputation of the amount owed at a reasonable or legal rate.
- Defense in collection suits: If a lender sues for the full amount of an excessive interest charge, the debtor may raise unconscionability as a defense.

V. Enforcement and Recent Developments

Equitable Reduction by the Courts
- The Supreme Court generally employs the doctrine of equitable reduction, meaning that if an interest rate is found unconscionable, the Court will reduce it to a level consistent with prevailing jurisprudence (often the legal interest rate of 6% or 12%, depending on the period involved).
Increased Consumer Awareness
- Government agencies and civil society organizations have pushed for greater financial literacy, encouraging debtors to know their rights and avoid abusive lenders.
- BSP Consumer Assistance Mechanism and the SEC’s enforcement against illegal lending companies offer some level of protection for borrowers.
Possible New Legislation
- From time to time, bills are filed in Congress seeking to re-impose statutory interest rate ceilings. While none have definitively reinstated fixed caps, the conversation continues, particularly to address predatory lending in microfinance and informal sectors.

VI. Conclusion

In the Philippines, while there is no strict statutory ceiling on interest rates after the suspension of the Usury Law’s caps, the principle that “excessive interest is void for being unconscionable” remains firmly entrenched in jurisprudence. Courts have the power—and, in fact, the duty—to intervene when contractual stipulations violate fundamental fairness and public policy, especially if they exploit vulnerable borrowers through exorbitant rates.

For small debts, where borrowers often lack bargaining power and are more susceptible to predatory lending, the legal system provides a safeguard through:

Court intervention to invalidate or reduce excessive rates.
Disclosure requirements under the Truth in Lending Act.
Regulatory oversight by the BSP and SEC, particularly for registered financial institutions.

However, the best defense for borrowers remains education, vigilance, and seeking timely legal assistance when confronted with abusive or extortionate lending practices. Creditors, in turn, benefit from ensuring that their stipulated interest rates and collection methods are both transparent and equitable—mitigating the risk of legal invalidation and reputational harm.

References (Key Legal and Regulatory Citations)

Act No. 2655 (Usury Law)
Central Bank Circular No. 905 (Series of 1982)
BSP Circular No. 799 (2013) and subsequent circulars on legal interest
Medel v. Court of Appeals, G.R. No. 131622 (November 27, 1998)
Nacar v. Gallery Frames, G.R. No. 189871 (August 13, 2013)
Civil Code of the Philippines (Articles 1306, 1956, etc.)
Truth in Lending Act (R.A. 3765)
Lending Company Regulation Act (R.A. 9474)
Financing Company Act (R.A. 8556)

Disclaimer: This write-up is a general overview and should not be taken as legal advice. For specific cases or in-depth concerns, consulting a licensed attorney or seeking guidance from appropriate government agencies (BSP, SEC, DTI, etc.) is recommended.