Excessive and Unconscionable Interest Rates

Everybody knows about “5-6” and similar lending schemes. Everybody also knows that, ironically, those who are in financial trouble are forced to accept ridiculously high interest rates – which, in many (almost all?) instances, leads to more trouble (financial or otherwise).

Indeed, with the suspension of the Usury Law and the removal of interest ceilings, the parties are free to stipulate the interest rates to be imposed on monetary obligations. However, while the Supreme Court (SC) recognizes the right of the parties to enter into contracts, this rule is not absolute.

In the case of Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation (G.R. No. 139290, 9 May 2006), the SC again dealt with the validity of an interest rate agreed upon by the parties. According to the SC:

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.

For instance, in Garcia v. Court of Appeals [1988], the SC sustained the interest rate of 24% per annum.

The agreed interest rate of 21% per annum was also sustained in Bautista vs. Pilar Development Corporation [1999].

On the other hand, in Medel vs. Court of Appeals [1988], the SC voided the interest rate of 5.5% per month (or 66% per annum) on a P500,000.00 loan, the same being “excessive, iniquitous, unconscionable and exorbitant, hence, contrary to morals (“contra bonos mores”), if not against the law.”

In Development Bank of the Philippines vs. Court of Appeals [2000], the SC reduced the stipulated interest rate from 18% to 10% per annum.

Now, going back to the case of Trade & Investment Development Corporation of the Philippines, the SC reduced the interest rate from 18% per annum to 12% per annum. The SC noted, among others, that the amount involved in that case has ballooned to the outrageous amount of more than 45 Million Pesos, which is four times the principal debt.

Again, remember that the validity of interest rates must be determined on a case to case basis.

9 thoughts on “Excessive and Unconscionable Interest Rates

  1. Romy Escarilla

    How about the 7% interest/penalty imposed by collection agencies of some credit card companies on delinquent accounts? I informed them of my intention to pay my account on installment. They insisted that if the installment is for one year, they will charge 7% interest per month, maybe because they know that the Usury Law is now inexistent. I requested for a fair interest rate, a lower rate based on the remaining balance. They refused to listen. Perhaps they would want to see me in court. Is there an alternative for me?

    Reply
  2. KoiBaltazar

    Hello Atty. i’m greatly confused if a contract of loan of 60,000 pesos with an interest of 5% deductable to the future claim of proceeds coming from a sale of property which i may say the contract was signed by the parties the creditor and debtor, let me say the approximated proceeds coming from the sale would be 20,000,000 pesos, that would make 1,000,000 pesos as interest plus the principal of 60,000 pesos that would be 1.060 million pesos which will be owed to the creditor, now let say i quadrupled the amount loan (300,000 loan, the interest would be 25% so the interest shall be 5 million + the 300,000, so what the creditor shall get is 5.3 million from the 20 million sale proceeds of the property) MY QUESTION IS, IS THE INTEREST THAT WAS GIVEN TO SUCH SCENARIO IS USURIOUS IN YOUR LEGAL OPINION? IS THERE A REMEDY TO THAT? greatly looking forward for your reply…

    Reply
  3. mcor

    Hello atty.i am a govt.employee.i had pawn my atm in a lending,my loan frm them is 120,000 with a monthly interest of 3%.nw i want to know is this legal?by the way the recipts that they issue is the back page of the scratch paper frm their cmputer,no TIN # ..in other words no official reciept.
    is this corrct?pls answer my questions

    Reply
  4. MeiMei

    Good evening! May I ask for a legal opinion. I am an OFW here in Taiwan. To be able to fully pay my Placement fee, I was referred by my recruitment agency to borrow money from a lending agency which I believe the owner of both company is the same. I borrowed only 15000 pesos payable in 1 month. They charged me 15240 NT around 22000 in peso. With 7000 peso interest per month, will that be reasonable and allowed by the court? It’s almost half of the principal amount.

    Looking forward to receiving an advice/assistance. Thank you so much!

    Reply
  5. Kat

    Dear Atty,

    My father died and has a loaned a property, being me as the co-maker since the property is under my name as an inheritance from my grandmother. As a co-maker, am I obliged to pay the loan? and since the loan has been unpaid for awhile now, the interest consumes a very high amount in total. Is there anyway I can plead for amicable settlement or amnesty? I have intent in paying it off but not with very high interest rate.

    Thank you.

    Reply
    1. jhey

      Hi ms kat. With you as co maker, you are secondarily liable. As to interest rate, kindly review your contract. If it is too unconscionable then you can refer it to legal.

      Reply
  6. Randell

    good evening,
    My Brother became an ofw last JULY 2015.. Due to the cost of the things he needed to fly to SouthKorea for the job, he applied for a loan worth 50,000 with me as the co-maker..
    the lending company release 5,000 at first the fee to Open up an Account at a Bank
    then they release another 45,000 pesos which was the actual money that became available to us since the 5,000 joint account opening deposit can not be touched…
    our payment for the loans started this sept 2015 by the amount of 13,968
    and the rest of payments from oct 2015 to Feb 2016 by the amount of 11,484
    summing this up would be 71,388 if payments are fully made….
    the payment period was 6 months from sept 2015 to feb 2016…
    From this, my layman’s point of view that 71,388 – 50,000 = 21,388 amount of interest acquired in 6 months of payment..
    Please help me understand this…
    1. was the interest given to us too much of the allowed interest in the phl. law?
    2. If yes,, where can we report our situation?

    thank you,

    Reply
  7. mae

    Good day attorney.I got a loan of 10k from a person with an interest rate of 20% per month. I was able to pay only 2 months amount of interest charges.I am unable to continue making payments yet.I am finding a way to repay her back.The lender is harrassing me through text messages saying unfavorable words,she is also sending threats.My promisory note and ids were posted to social media.Is these against the law?I dont have the intention not to pay the party.But her actions and words are unacceptable.What can I do?

    Reply

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