Legality of Excessive Interest Rates in Online Lending Apps (Philippines)
April 2025 | Prepared for general information only – not a substitute for legal advice.

1. Executive summary

No more absolute ceiling. The Usury Law (Act No. 2655) still exists, but Monetary Board Circular No. 905 (Dec. 1982) suspended all interest‑rate ceilings. Since then, courts apply a “reasonableness/unconscionability” test instead of a fixed cap.
Sector‑specific caps have since been re‑introduced. – Credit cards: 24 % p.a. (2 %/month) under BSP Circular No. 1098 (2020) as amended.
– Small‑value consumer loans of lending/financing companies (the typical online‑lending‑app product): 6 %/month nominal interest + 5 %/month penalty cap under SEC Memorandum Circular No. 3‑2022 (in force since 6 July 2022).
Key regulators: Bangko Sentral ng Pilipinas (BSP) for banks, EMI‑wallet providers and credit‑card issuers; Securities & Exchange Commission (SEC) for lending/financing companies, including most stand‑alone online apps; National Privacy Commission (NPC) for data‑harassment issues; Department of Trade & Industry (DTI) for deceptive advertisements; and courts for civil or criminal actions.
Borrower remedies: file administrative complaints (SEC, NPC, BSP), civil actions to nullify or re‑compute usurious/unconscionable interest, or seek criminal prosecution for unlicensed lending (Lending Company Regulation Act of 2007).
Trend: After years of laissez‑faire, Congress (Financial Consumer Protection Act 2022) and regulators are tightening rules on digital credit, signalling that excessive rates are no longer tolerated.

2. Statutory & regulatory framework

Instrument	Core rule on interest	Applicability to online lenders
Usury Law (Act 2655, as amended)	Original ceilings (e.g., 12 %/p.a.) now inoperative; unconscionability doctrine applies	Universally applicable, but only as a yard‑stick for courts
BSP MB Circular No. 905 (1982)	Suspended Usury‑Law ceilings	All lenders
Truth in Lending Act – RA 3765 & BSP “Disclosure” Regs	Requires full cost disclosure (APR, fees, penalties)	All credit providers, including apps acting through partner banks/EMIs
Lending Company Regulation Act – RA 9474 (2007)	License, minimum paid‑up capital, disclosure, prohibition of “unconscionable” rates	SEC‑licensed lending companies (many online apps)
Financial Consumer Protection Act – RA 11765 (2022)	Empowers BSP/SEC/IC to set ceilings & punish abusive conduct	All “financial products & services”, expressly covers digital‑credit apps
SEC Memorandum Circular No. 3‑2022	Caps for “short‑term, small‑value, consumer credit” (≤ ₱10,000; tenor ≤ 4 months): • Interest ≤ 6 %/month (0.2 %/day) • Penalty ≤ 5 %/month on outstanding principal • Processing fees ≤ ₱1/₱200 or 5 % (whichever lower)	Lending/financing companies (& their apps)
BSP Circular No. 1098 (2020)	Credit‑card ceiling: interest ≤ 24 % p.a.; finance‑charge caps; cash‑advance fee ≤ ₱200	Banks & credit‑card issuers; some e‑wallet “cardless” installment products
Data Privacy Act – RA 10173 & NPC Circular 20‑01	Consent‑based data use; harassment collection tactics prohibited	All apps (lender or third‑party) that scrape phone contacts/photos
Access Devices Regulation Act – RA 8484, Cybercrime Act	Penalizes fraudulent or coercive collection via electronic means	Online‑lending operators/personnel

3. Jurisprudence on unconscionable interest

Even without a statutory cap, Philippine courts have routinely struck down inordinate rates as “unconscionable” and reset them to 12 % p.a. (before Nacar, 6 % thereafter):

Medel v. Court of Appeals (G.R. 131622, 27 Nov 1998) – 5.5 %/month (66 % p.a.) void; reduced to 12 % p.a.
Spouses Castro v. Tan (G.R. 168940, 24 Apr 2007) – 6 %/month void; cut to 12 % p.a.
Macalinao v. BPI (G.R. 175490, 17 Oct 2016) – 3.5 %/month credit‑card finance charge invalid, recomputed at 12 % p.a.
Nacar v. Gallery Frames (G.R. 189871, 13 Aug 2013) – clarified that legal interest is now 6 % p.a.; basis for re‑computation when court voids a rate.

Key test: whether the rate “shocks the conscience,” considering bargaining power, market norms, risk allocation, and public policy.

4. Special rules for online lending apps

Must be licensed – An app offering credit directly to the public is either:
- an SEC‑registered lending company (min. paid‑up cap ₱1 million) or
- an SEC‑registered financing company (₱10 million) or
- a BSP‑supervised bank/EMI offering credit (e.g., e‑wallet cash loan).
  Operating without the proper license is a criminal offense (RA 9474: up to ₱1 million fine + imprisonment).
Disclosure & advertising – Total cost of credit must be stated upfront (APR, fees, penalties). Splash‑screen “₱0 interest” promos while hiding 30 % service fees have already led to SEC show‑cause orders.
Caps now active – From 6 July 2022 the 6 %/month + 5 % penalty rule binds all SEC‑licensed online‑lending platforms dealing in short‑term consumer credit. Violators face suspension or revocation of license and administrative fines up to ₱1 million per transaction.
Collection conduct –
Banned: threatening borrowers’ contacts, posting personal debts on social media, obscene language.
Legal basis: NPC Circular 20‑01 (Guidelines on Processing Personal Data for Loan‑Related Transactions) + SEC Memorandum Circular 18‑2019 (Prohibition of Unfair Collection Practices).
Data scraping – Apps may not require blanket access to phone contacts/photos “as a condition for loan approval.” Violations can lead to NPC cease‑and‑desist orders and damages under RA 10173.

5. Typical borrower remedies

Problem encountered	Where / how to complain
Rate exceeds 6 %/mo. (or 24 % p.a. for cards)	SEC Online Complaints Form → Enforcement & Investor Protection Dept.
Unlicensed app	SEC ‑ Corporate Governance & Finance Dept.; PNP Anti‑Cybercrime Group for criminal case
Harassment / data privacy breach	NPC complaints portal; claim moral damages in RTC
Mis‑disclosure of fees	DTI (false advertising) or BSP Consumer Assistance Mechanism for BSFIs
Want rate reduced by court	File civil action (collection or sum‐of‐money case); plead that rate is void for unconscionability; courts usually recompute at 6 % p.a.

6. Interaction with taxation & usury treatment

Gross receipts tax (GRT) – Lending companies pay 5 % GRT on interest, discounts and finance charges; excessive rates still form part of the tax base.
Documentary stamp tax (DST) – Payable on loan documents; an unlicensed status does not exempt liability.
Illegal‑interest defence in criminal estafa – Borrowers cannot avoid prosecution for bounced checks by merely alleging usury; but evidence of unconscionable rates may mitigate penalties.

7. Policy developments & future outlook

Fintech innovation sandbox – BSP’s Regulatory Sandbox Framework (Circular 1153‑2022) allows pilots, but interest‑rate caps cannot be waived.
Congressional proposals – Several 20th‑Congress bills seek to restore a general Usury Law ceiling (proposed 36 % p.a.) to tame online‑lending rates.
Regional comparison – Indonesia’s OJK caps at 0.4 %/day; Vietnam’s Civil Code caps at 20 % p.a. The Philippines’ current 6 %/mo. (≈ 72 % p.a.) remains high by ASEAN standards, suggesting scope for tighter limits.
Enforcement trend – SEC has already revoked or suspended > 100 online‑lending apps (2022‑2024) and routinely shares evidence with the Department of Justice for cyber‑libel and privacy‑law prosecution.

8. Practical compliance guide for operators

Secure proper SEC certificate of authority before launch.
Program loan‑pricing engine to respect 0.20 %/day cap; flag any override.
Present a Total Cash‑out screen showing: principal, interest, fees, APR.
Remove “contacts” & “gallery” permission requests; justify any data collected under least‐intrusive standard.
Train collection staff; adopt call‑script prohibiting threats or disclosure to third persons.
Retain call logs & transaction data – the SEC now conducts random audits.
Establish a consumer redress mechanism (RA 11765, Sec. 8).

9. Checklist for borrowers before tapping an online‑lending app

Is the app in the SEC’s “List of Licensed Lenders”? Check sec.gov.ph.
APR math: Multiply the displayed “per‑day” rate by 365 to gauge true cost.
Read the data‑privacy notice: Does it demand access to contacts or photos? Red flag.
Penalty clauses: Law caps them at 5 %/month; anything higher is void.
Keep records: Screenshots of disclosures, receipts, chat threads – they are crucial if you later challenge the loan.

10. Conclusion

While the Philippines formally lifted usury ceilings four decades ago, excessive interest is not legal per se. Courts have long voided rates that “shock the conscience,” and, starting 2020–2022, regulators have re‑imposed explicit ceilings for the two products most abused in the digital era: credit cards (24 % p.a.) and small‑ticket online loans (6 %/month + limited fees).

Online‑lending platforms that ignore these limits now face swift SEC/NPC crack‑downs, multi‑million‑peso fines, and even criminal charges. Borrowers, in turn, are better protected by the Financial Consumer Protection Act, a growing body of jurisprudence, and readily accessible complaint portals.

Bottom line: In the Philippine context, the legality of an interest rate hinges on (a) the specific product cap that may apply, and (b) the age‑old test of reasonableness and public policy. Any rate above the SEC or BSP ceilings—or one that courts deem unconscionable—can be nullified, recomputed, and expose the lender to administrative, civil, and criminal sanctions.

Prepared by ChatGPT (o3). For educational purposes only; seek professional counsel for specific cases.