Below is a comprehensive discussion of usury laws and the regulation of excessive interest rates in the Philippines, incorporating historical underpinnings, statutory provisions, jurisprudential guidelines, and current legal standards.

1. Historical Background of Usury Laws in the Philippines

1.1. The Usury Law (Act No. 2655)

Enactment: The original Usury Law, Act No. 2655, was passed in 1916 during the American colonial period to regulate and limit the amount of interest that may be charged on loans and forbearances of money.
Purpose: Primarily aimed to protect borrowers from oppressive and unconscionable interest rates and to deter “loan sharks” (sometimes referred to as “5-6” lenders in colloquial terms).

1.2. Amendments and Role of the Monetary Board

Over time, the Usury Law was amended through various legislative acts and presidential decrees, shifting the authority to set interest rate ceilings to the then Central Bank of the Philippines (now Bangko Sentral ng Pilipinas, or BSP).
Central Bank Circulars: These circulars periodically adjusted maximum interest rates to align with changing economic conditions. Ultimately, through subsequent laws and issuances, the Philippines moved toward a more liberalized interest rate regime, effectively suspending statutory ceilings but subjecting interest rates to judicial scrutiny for unconscionability.

2. Governing Principles Under Current Philippine Law

2.1. Suspension of Fixed Interest Rate Ceilings

Presidential Decree (P.D.) No. 1684, as well as related Central Bank (CB) Circulars, suspended the Usury Law’s interest rate ceilings. This effectively deregulated interest rates, meaning private parties could generally stipulate any interest rate in their contracts.
Continuation of Usury Law: While interest rate caps are no longer strictly set by statute or regulation, Act No. 2655 has not been repealed in its entirety. It still operates to the extent that courts can declare null and void stipulations that are deemed “usurious” or “unconscionable,” even though the old ceilings themselves are suspended.

2.2. Civil Code Provisions on Interest

Article 1956 of the Civil Code: States that “[n]o interest shall be due unless it has been expressly stipulated in writing.” If the parties wish to charge interest on a loan, they must clearly put it in writing; otherwise, the legal interest rate applies.
Legal Rate of Interest: For loans or forbearances of money where the rate is not stipulated, courts have looked to issuances of the Bangko Sentral ng Pilipinas. The prevailing legal interest rate in the Philippines has been set at 6% per annum in most cases of forbearance of money, as clarified by jurisprudence and BSP circulars.

2.3. Usury vs. Unconscionable Interest

Technical Usury: Historically, charging more than the statutory limit was strictly considered usurious, penalized by law. However, strict ceilings are now inoperative due to deregulation.
Unconscionability Standard: Courts have the power to reduce or invalidate interest rates that are deemed “unconscionable,” “excessive,” or “iniquitous.” Unlike rigid statutory caps of the past, the modern standard examines fairness, equity, and public policy considerations on a case-by-case basis.

3. Determining “Excessive” or “Unconscionable” Interest

3.1. Judicial Power to Modify Interest Rates

Equitable Reduction: In numerous Supreme Court decisions, if a stipulated interest rate is found to be excessive (e.g., 36%, 60%, or higher per annum), courts have deemed it unconscionable and reduced it to a more reasonable level (often 12% or 6% per annum, depending on the circumstances and relevant jurisprudential guidelines).
Case-by-Case Basis: The Supreme Court has refrained from imposing a hard numerical threshold for “unconscionability.” Instead, it reviews the factual context, the parties’ bargaining power, commercial realities, and any indication that the lender took advantage of the borrower’s distress.

3.2. Illustrative Supreme Court Rulings

Medel v. Court of Appeals (1998): The Supreme Court struck down an interest rate of 5.5% per month (66% per annum) as excessive and reduced it to 12% per annum.
Garcia v. Court of Appeals (2000): A 60% per annum interest rate was likewise declared unconscionable, prompting the Court to lower it to 12% per annum.
Subsequent Adjustments: Later jurisprudence aligned the legal interest rate at 6% per annum for loans, unless the parties have validly agreed on a different rate that the court does not find excessive.

4. Current Legal Framework

4.1. Bangko Sentral ng Pilipinas Circulars

BSP Circulars have established that lending institutions may generally set their own interest rates, subject to market conditions. However, banks and other financial institutions must still abide by regulations relating to disclosure, consumer protection, and fair lending practices (e.g., the Truth in Lending Act, R.A. 3765).

4.2. Consumer Protection Laws

Republic Act No. 3765 (Truth in Lending Act): Requires lenders to disclose to borrowers the true cost of credit, including finance charges and effective interest rates, to ensure informed consent and reduce predatory lending.
Financial Products and Services Consumer Protection Act (R.A. 11765): Further empowers financial regulators (BSP, Insurance Commission, and the Securities and Exchange Commission) to oversee consumer protection standards in financial transactions.

4.3. Contractual Autonomy and Limitations

While Filipino law generally respects the parties’ freedom to contract (Civil Code Article 1306), that freedom is not absolute. Contracts whose stipulations are contrary to law, morals, good customs, public order, or public policy shall be void (Article 1306 in relation to Article 1409, Civil Code).
Excessive interest rates, though not covered by rigid ceilings, may still be struck down as contrary to morals or public policy, given that they exploit borrowers and serve no legitimate commercial purpose.

5. Practical Implications

5.1. For Lenders

Disclosure and Transparency: Lenders must clearly communicate all charges, including interests, penalties, and other fees. Non-compliance with the Truth in Lending Act can result in administrative penalties and civil liabilities.
Risk Assessment: Charging very high interest rates increases the likelihood of judicial interference if a dispute arises. Courts have repeatedly reduced usurious stipulations.

5.2. For Borrowers

Vigilance Before Signing: Borrowers should read the loan agreement carefully, especially the portion discussing interest, penalties, and default charges.
Legal Recourse: If trapped in an agreement with a significantly high interest rate, borrowers may invoke the concept of unconscionability before the courts to seek reduction in the rate. However, each case is decided based on its own facts and circumstances.

5.3. For Courts and Legal Practitioners

Balancing Interests: Courts strive to strike a balance between honoring the contractual autonomy of the parties and protecting borrowers from predatory or excessively one-sided agreements.
Standard Judicial Reduction: In many instances, when declared “unconscionable,” the Supreme Court adjusts the rate to 12% or 6% per annum, depending on existing circulars and prior rulings at the time of the transaction or the date of judgment.

6. Ongoing Developments and Observations

Evolving Economic Conditions: Philippine monetary policy can shift over time based on inflation, market liquidity, and global factors. The BSP may issue new circulars that affect the guiding legal interest rates.
Digital Lending Platforms: With the rise of fintech and online lending apps, concerns about predatory lending and excessive hidden charges have emerged. The Securities and Exchange Commission (SEC) and BSP actively regulate and monitor these platforms to curb abusive practices.
Heightened Consumer Awareness: The government and various consumer protection groups continue to advocate for more transparency, urging borrowers to report abusive lenders. Courts are likewise vigilant in scrutinizing questionable lending activities.

7. Conclusion

In the Philippines, while the strict statutory ceilings of the Usury Law are essentially suspended, the spirit of protecting borrowers from excessively high interest rates remains embedded in current legal doctrine. Courts uphold party autonomy in setting interest rates but will not hesitate to nullify or reduce rates that they find iniquitous, unconscionable, or contrary to public policy.

Ultimately, the landscape of interest rate regulation in the Philippines strikes a balance between a liberalized, market-driven approach—permitting freedom of contract—and a protective stance, ensuring that the vulnerable are not exploited through prohibitive or predatory interest charges. Lenders are thus encouraged to exercise prudence and transparency, while borrowers are reminded to be vigilant and aware of their legal remedies against excessive interest rates.