Is 5% Monthly Interest Legal in the Philippines?

Not a fixed one for ordinary loans. Article 1961 of the Civil Code says usurious contracts are governed by the Usury Law and other special laws. In its 2022 Resolution in Lara's Gifts & Decors v. Midtown Industrial Sales, the Supreme Court noted that Central Bank Circular No. 905, Series of 1982, "effectively lifted the ceiling on interest rates."

That does not mean any rate goes. The same Resolution says that agreed interest rates, "whether conventional or compensatory, are subject to the 'unconscionability' standard". In other words, the parties are free to agree on a rate, but a court can refuse to enforce a rate that is unconscionable.

This page covers loans between private parties under the Civil Code. Lending and financing companies, including online lending apps, may be under separate rules that this page does not cover. See Online lending app harassment: what the law says.

Five percent a month is 60% a year. The legal interest rate is 6% a year (see What is the legal interest rate?). So 5% a month is ten times the legal rate, and five times 12% a year, which is twice the legal rate (the Court speaks of "twice the prevailing legal rate", explained below).

On a ₱100,000 loan, 5% a month is ₱5,000 every month, or ₱60,000 a year, before any penalty charges.

There is no single number. Lara's Gifts (2022) says interest rates "become unconscionable in light of the context in which they were imposed or applied", so the question rests on the court's discretion based on the facts of each case.

The Court has given a working test. In Spouses Abella v. Spouses Abella (2015), it said the legal rate is the presumptive reasonable compensation for borrowed money. When the agreed rate is more than twice the prevailing legal rate, "it is for the creditor to prove that this rate is required by prevailing market conditions." Lara's Gifts (2022) repeated this and added that the creditor "must also show that the parties were on an equal footing when they stipulated on the interest rate."

So, with the legal rate at 6% a year:

This is a rule about who must prove what. It is not a legal cap, and a rate below 12% can still be questioned on its facts.

Yes, in earlier cases. Lara's Gifts (2022) says: "This Court had struck down stipulated monthly interest rates of 2.5%, 5%, 6%, and 10% for being unconscionable." In the same passage, the Court described Toledo v. Hyden, where a monthly rate of 6% to 7% was upheld because the borrower was not in urgent need of money and was herself guilty of unfair acts.

In Abella, the lenders wanted 2.5% a month, or 30% a year. The Court showed how, compounded, the debt on a ₱500,000 loan would have grown to more than ₱33 million by 2015. It called the rate unconscionable and said interest "is not the default vehicle for predatory gain."

These cases show the pattern: high monthly rates are often struck down, but the result depends on the facts.

Only the rate goes. Lara's Gifts (2022) says that when the agreed rate is unconscionable, "only the rate is nullified and deemed not written into the contract; the parties' agreement on the payment of interest remains." The court then applies the legal rate prevailing when the agreement was made.

The borrower still owes the principal. Under Article 1953 of the Civil Code, a borrower must pay back an equal amount of the same kind and quality. A finding that the interest is too high does not cancel the loan.

Penalty charges are treated the same way. Article 1229 says a penalty "may also be reduced by the courts if it is iniquitous or unconscionable", and Lara's Gifts (2022) notes that the Court has reduced or removed penalty charges that were unconscionable.

Yes. Article 1956 says:

A rate agreed only by word of mouth ("5% a month" said but never written down) is not due as interest. If a signed note says "with interest" but gives no rate, Abella applied the legal rate in force when the note was signed. See Is a promissory note valid without a notary?

These are made-up examples to show how the rules work. They are not advice for any real case.

Rosa borrowed ₱100,000 from Tess, a private lender. The signed note says "5% interest per month". Rosa paid for a while, then stopped. If Tess sues, she must show that 5% a month (60% a year) is required by market conditions and that she and Rosa were on equal footing. If the court finds the rate unconscionable, it strikes out the rate and applies the legal rate prevailing when the note was signed. Rosa still owes the ₱100,000.

Dan borrowed ₱10,000 from his officemate. They agreed out loud on "5% a month", but nothing was written down. The 5% is not due as interest (Article 1956). If Dan pays late after a demand, the officemate can claim only legal interest as damages for the delay.

Liza lends ₱30,000 at 1% a month (12% a year) under a signed note. That is not above twice the legal rate, so the extra burden of proof does not apply. Liza can still be asked to prove the loan and the agreement.

Talk to a lawyer if you are being sued on a loan with a high monthly rate or penalty charges, if you are a lender deciding what rate to put in a contract, or if a lending company is involved. Whether a rate is unconscionable is decided case by case, on the evidence. If you cannot afford a lawyer, see Free legal help in the Philippines.