The Concept of ‘The Usury Law’ and the Current Rule on Interest Rates

The Rule on ‘The Truth in Lending Act’ and Disclosure Requirements

March 23, 2026

The Rule on ‘The Secrecy of Bank Deposits’ (RA 1405) and its Exceptions

March 23, 2026

I. Introduction

This memorandum provides an exhaustive analysis of the concept of usury and the current legal framework governing interest rates in the Philippines. It traces the historical development from a strictly regulated regime under the Usury Law to the present policy of interest rate liberalization. The memo will examine the repealed statute, the current legal basis for setting interest rates, the distinctions between monetary interest and compensatory interest, and the applicable ceilings and remedies available under prevailing law.

II. Historical Background: The Usury Law (Act No. 2655)

The primary statute governing interest rates for most of the 20th century was Act No. 2655, commonly known as the Usury Law, enacted in 1916. Its core purpose was to protect borrowers from excessively high interest rates by imposing statutory ceilings. The law defined usury as contracting for or receiving interest in excess of the allowable rates set by the Monetary Board. Violation was both a criminal offense and a ground for the recovery of excessive interest paid. For many decades, the Usury Law set a ceiling of 12% per annum on loans, with the Monetary Board authorized to prescribe different rates.

III. Repeal and Liberalization: Central Bank Circular No. 905

A pivotal shift in policy occurred in 1982 with the issuance of Central Bank Circular No. 905, Series of 1982. This circular expressly suspended the interest rate ceilings prescribed by the Usury Law. Its whereas clause declared that “the limits on the rate of interest prescribed by the Usury Law are suspended, as they are rendered ineffectual by prevailing economic conditions.” Consequently, parties were granted the freedom to stipulate any interest rate in their loan agreements. It is crucial to note that Circular No. 905 did not repeal the Usury Law itself but only suspended its ceiling provisions. The law’s other provisions, particularly those on usurious transactions, remained in the statute books.

IV. Complete Repeal: The New Central Bank Act (R.A. No. 7653)

The final step in interest rate liberalization was the passage of Republic Act No. 7653, The New Central Bank Act of 1993. Section 121 of this law provided for the repeal of Act No. 2655, the Usury Law, along with other specified statutes. This explicit repeal removed the Usury Law from the legal landscape entirely, thereby eliminating any statutory ceiling on interest rates for most types of loans. The policy of non-regulation, initiated by Circular No. 905, was thus codified into law.

V. Current Legal Basis for Interest Rates

In the absence of a general usury law, the primary legal basis for stipulating interest rates is the principle of freedom of contract under the Civil Code. Article 1306 of the Civil Code states that contracting parties may establish such stipulations as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Therefore, parties are free to agree upon any interest rate. However, this freedom is not absolute and remains subject to judicial review for unconscionability.

VI. Key Distinctions: Monetary Interest vs. Compensatory Interest

Philippine law distinguishes between two primary types of interest, each with its own rules:

Monetary Interest: This is the interest agreed upon by the parties in a loan or forbearance of money, goods, or credits. It is conventional interest that arises from contract. In the absence of stipulation, no monetary interest shall be due.

Compensatory Interest: This is interest imposed by law as damages for delay or breach. It is governed by Article 2209 of the Civil Code, which states that if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages shall be the payment of interest at the rate agreed upon, or in the absence of stipulation, at the rate of six percent (6%) per annum. This is also known as legal interest or moratory interest.

VII. Comparative Table: Key Legal Provisions on Interest

The following table compares the governing provisions for different scenarios involving interest.

Scenario	Legal Basis	Rate	Purpose & Notes
Stipulated Loan Interest	Freedom of Contract (Art. 1306, Civil Code)	As agreed upon by parties	Monetary/Conventional interest. Subject to unconscionability challenge.
Interest when No Rate is Stipulated	Art. 1956, Civil Code	None	No monetary interest is due unless expressly stipulated in writing.
Compensatory/Legal Interest for Delay	Art. 2209, Civil Code	6% per annum (or agreed rate)	Applies from time of judicial or extrajudicial demand in case of breach or delay in payment of a sum of money.
Interest on Judgments	Central Bank Circular No. 799	6% per annum	Applies to judgments for a sum of money from finality until full satisfaction. Supersedes the old 12% rate.
Unpaid Interest becoming Principal	Art. 2212, Civil Code	Same as principal obligation	Interest upon interest is allowed only if agreed in writing, or when judicially demanded.

VIII. The Principle of Unconscionability

While no statutory maximum exists, the Supreme Court has consistently held that stipulated interest rates may be declared unconscionable and reduced by the courts. A rate is unconscionable if it is so excessive, iniquitous, and one-sided as to shock the conscience. The court will consider factors such as prevailing rates at the time of stipulation, the standing of the parties, the nature of the transaction, and the existence of undue influence. This judicial power serves as the primary check against exploitative lending practices in the post-Usury Law era.

IX. Special Laws with Interest Rate Ceilings

Despite the general liberalization, certain special laws impose specific interest rate ceilings on particular types of transactions or lenders:

The Truth in Lending Act (R.A. No. 3765): Requires disclosure of finance charges but does not set ceilings.

The Agrarian Reform Code (R.A. No. 3844): Sets limits on interest rates for loans granted to agricultural tenants.

Laws governing pawnshops, lending companies, and microfinance institutions often authorize the Bangko Sentral ng Pilipinas or the Securities and Exchange Commission to set ceilings or guidelines for these specific entities.

The Civil Code itself sets a ceiling for loans of grains or other goods: if they are returned in kind, any stipulation for monetary interest is void (Art. 1957).

X. Conclusion and Recommendations

The Philippine legal framework on interest rates has evolved from strict statutory ceilings under the Usury Law to a liberalized system based on freedom of contract. The current rule is that parties may stipulate any interest rate, but such rates remain subject to judicial reduction for being unconscionable. Distinctions between monetary and compensatory interest are critical for correct application. For practitioners:

Ensure loan agreements clearly and expressly stipulate the interest rate in writing to avoid the application of Art. 1956.

Advise clients that while rates are generally free, courts will intervene against grossly excessive rates.

For delays and judgments, apply the correct legal interest rates (6% per annum under Art. 2209 and Circular No. 799).

Always verify if a special law applies to the specific transaction or entity involved, as these may impose regulatory ceilings.

The overarching principle is that of contractual autonomy, tempered by equity and the courts’ power to prevent oppression.