Usury and Unconscionable Interest Rates

With the suspension of the Usury Law and the removal of interest ceilings, the parties are generally free to stipulate the interest rates to be imposed on monetary obligations. As a rule, the interest rate agreed by the creditor and the debtor is binding upon them. This rule, however, is not absolute.

In a recent case, the SC again dealt with the validity of interest agreed by the parties, stating that:

Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. What may be iniquitous and unconscionable in one case, may be just in another.

In that case, the SC reduced the interest rate from 18% to 12% per annum, noting, among others, that the amount involved has ballooned to an outrageous amount four times the principal debt.

Indeed, there is no hard and fast rule to determne the reasonableness of interest rates. Stipulated interest rates of 21%, 23% and 24% per annum had been sustained in certain cases.

On the other hand, there are plenty of cases when the SC equitably reduced the stipulated interest rates; for instance, from 18% to 10% per annum. The SC also voided the stipulated interest of 5.5% per month (or 66% per annum), for being “excessive, iniquitous, unconscionable and exorbitant, hence, contrary to morals (“contra bonos mores”), if not against the law”. The same is true with cases involving 36% per annum, 6% per month (or 72% per annum), and 10% and 8% per month. In these instances, the SC imposed the legal interest of 12%.

Just to be clear, “legal interest” doesn’t mean that anything beyond 12% is “illegal”. It simply means that in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum.

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Sources: Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation (G.R. No. 139290, 9 May 2006); Development Bank of the Philippines vs. Court of Appeal; Garcia vs. Court of Appeals; Medel vs. Court of Appeals; Security Bank and Trust Company vs. RTC Makati; Spouses Solangon vs. Salazar; Cuaton vs. Salud; Ruiz vs. CA; Eastern Shipping vs. Court of Appeals, G.R. No. 97412 July 12, 1994.

39 thoughts on “Usury and Unconscionable Interest Rates

  1. Ryan

    Dear Atty.,

    I’m a government employee. I would like to be enlightened if the 30 percent per annum is still legal because this is the rate that the money lender charges me. Also, they do not issue any official receipt every time payment is made through my ATM card used as a collateral for my loan. I hope you can give me an advice regarding this issue becuase this may not only be useful for me but also for the others. Thank you so much.

    Reply
  2. Don

    Atty,
    My partner and I bought a laptop via staggered pay option amounting to PHP 19000 payable in 1 year. We were able to pay 7 months but she got laid off and withmy smallsalary we couldn’t continue with our payment. Our last balance was only PHP 9445. Unfortunately, until now, she has not secured a job. We recently got a call that she has a bench warrant fornon payment, when we contacted the collection agency, they say that we need to pay 39000. We can’t pay 9445, how can we pay 39000? What options do we have to avoid court appearance or possible imprisonment? We have a child who can’t afford to lose a mother just because of a lousy laptop.

    Reply
  3. NORBERTO

    BSP MB Circular No. 799, Series 2013 – when there is no stipulated interest in a contract of loan, the legal interest shall be 6%

    G.R. No. 211228 November 12, 2014
    UNIVERSITY OF PANGASINAN, INC., CESAR DUQUE/JUAN LLAMAS AMOR/DOMINADOR REYES, Petitioners,
    vs.
    FLORENTINO FERNANDEZ and HEIRS OF NILDA FERNANDEZ, Respondents.

    “x x x.

    As to the correct rate of imposable interest, the petitioners argue that only 6% and not 12% is mandated pursuant to the ruling in Nacar.

    Nacaris instructive anent the rate ofinterest imposable upon the total adjudged monetary award, viz:

    [T]he Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the amendment of Section 240 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799,41 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:

    The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:

    Section 1. The rate of interest for the loan or for bearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

    Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.

    Reply
  4. Emily

    May loan po ako with a principal amount of P30k. Agreement is for 6 months. I already paid 20k and i was told remaining balance is 21k. And also interest is daily. Is this legally acceptable? Loan is exceeding 6 months not yet 7 mos.

    Reply
  5. MICHAELA

    Dear atty,

    Ako po ay nagkautang last 2014 worth 100k nagbigay ako ng cheke pero walang date. Binigyan ako pero less na ang 20% interest. Binabayaran ko po sya hanggang ngayon KC nahirapan na po ako bayaran sya taong 2015. Ang nabayad ko na po ay mahigit 300 k plus na pero sabi nya nasa 70k pa ang utang ko. Gusto ko na matapos ito my mga resibo ako g ayment ko na IBA KC SA Palawan ko pinapadala para sa pangalan nya. Ngayon patuloy pa rin pananakot nya.

    Reply

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