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 ceiling, the parties are free to stipulate the interest rates to be imposed on monetary obligations. However, while the Supreme Court recognizes the right of the parties to enter into contracts, this rule 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.
——————–
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.
this is a nice site specially me being a young entrepreneur
that needs the side of the law to move and make the business legal
“But” if unpaid interest is to be compounded monthly then a 5.5% monthly interest would compute to nearly 80% annual interest.
My uncle borrowed money from a “loan shark” and used as collateral their house & lot. He’s been paying partially but the loan has ballooned already due to the exorbitant interest rates. I think he only borrowed P1m-P2m five years ago and has paid since then, P6-P7m but he’s still in debt because of the very high interest (i.e. 6%-7% month or 72%-84% per annum!). Nabaon na sila sa utang and they have sold most of their properties (lot, car, jewelries, another house & lot, etc) but they just can’t catch up with the loan balance because of the interest! How can they get out of this situation?! Napunta na lahat sa loan shark ang kabuhayan nila and there’s a risk now that they will also lose their house & lot because the loan is not yet fully paid.