Lending Interest Rates: When Excessive and Unconscionable

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 (per year), 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 determine 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. Also posted here.

29 comments

  1. Legal po ba ang 3%monthly interest na pinapatong ng lending sa loan ko?at wla slang official reciept n binibgay..scratch paper lang ung rcibo nla…is this correct?

  2. tama po ba ang 20% interest kada 10 days, di man po nmin nabayaran ng buong buo sang utang nmin s loob ng 10 days kung i cocompute po nmin e sobra p s 200% n ang naibabayad nmin but still my utang pa daw kmi dahil dito di n kami ngbayad pa, kaya nmn po pinabarangay kmi at i dadaan n daw po s korte, my karapatan po b xang magdemanda? at kailangan p po ba nming mag bayad? sobrang laki n po ng naibabayad nmin.
    wala nmn po syang resibo n binibigay scratch lang wala pang date.

  3. Hi, nangutang po ako ng 20k nung January 2011 na ang nakaprenda eh yung payroll atm namin, ang binigay sa akin e 16,500, kasi kinaltas na nila yung tubo which is 18% payable in 3 months. so ang hulog ko eh 3,333 kada sahod kinsenas-katapusan. Nakapaghulog ako nung una, pero natanggal po ako sa trabaho, tapos di ako nakapaghulog ng pangalawa, pangatlo….ang hulog ko po uli e nung panganim na hulog na dapat na 3,333, so 4 ang di ko nahulugan. Kaya lang nabuntis po ako at tumigil sa trabaho, so tumubo po ng tumubo yun. hanngang sa maging 15k, nakipagayos ako at naghulog ako ng 5,500 tapos 3,500 uli. pero nagsara yung pinasukan ko, so tigil uli ako..tapos tumubo na naman, hanggang sa maging 23k na daw, naghulog uli ako, at nung huli ay 7000 nung february, kasi sinurrnder ko uli yung atm ko..kaso laging matagal bago ko makuha yung sukli sa sahod ko kasi nasa kanila yung atm ko. Bale lahat ng nahulog ko eh 22,500 lahat, yun nga lang tumagal ng 1 taon at kalahati kasi patigil tigil. Nung hindi na ko makabayad, sinampa nila direkta sa judge at pinadalhan ako ng notice of hearing, pero dun kami sa harap mismo ng judge magusap daw. ang sabi ko hulugan ko pero sana tigil na yung tubo kasi nabayaran ko na nman yung 22k. Ayaw nila pumayag. gusto nila kahit isinampa dirediretso, at kaibigan po nung nagsampa nung kaso yung judge. ano po ba maganda gawin?

  4. hi po last march2012 nangutang po ako 90k para negosyo 10%interest.ang na bayad kulang 48k until march.may 2013 nag recompute kami umabot nalang 126k.jul to oct 18k ang na bayad ko.ngayon katapusan sa december recompute 126k plus 10%interest in 12mons. minus na na bayad ko. tama pa ba ito?

    ano po tapat ko gagawin?

  5. My case is different.
    I want to take a loan shark to court.
    I owed this person 70k for more than 2yrs. paying her 10% interest per month. Actually that lead to that 70k because she added up the interest of it every time I failed to pay in previous months. The interest itself is hard on me when until then I have difficulty paying it.
    Now I want to pay her gradually without paying that much interest every month by taking her to court.
    How can I do that to start with?
    Thank you.

  6. I owed 70k from a loan shark here. I’ve been paying 10% interest every month for more than 2 yrs now. Actually it came to that amount because there were months that I was not able to pay the interest, so she added it up on the original amount which was only 45k then.
    Now, i am tired of paying the interest because my businesses were closed.
    I want to settle this in court. I want this person to take to court to settle my debt.
    How can I do it to start with?
    Thank you.

  7. i just want to ask about may case dati po kasi mga 2013 nakahiram kami ng 2500, pero nabalik po namin yung mismong puhunan nila..pero may tubo po yun..the case is hindi agad napabigay..sinarado po nila sa 5000 yung kabuuang halga na aming babayaran..bakit po ganun..nagbayad na po kami kahapon pro hinihingan pa kami ng another 5000 pa..parang sobrang sobra na naman pong panggigipit yun..2,500 na nahiram tumubo ng 5000 tapos nahingi pa ng another 5k..para naman po hindi na makatarungan yun..umabot ng 10,000 ang patubo nya..hindi naman po legal ang paluwagannya..anu po ba ang hakbang na maari naming gawin..salamat po

  8. may ask lang po ako, 20k po kasi nakahiram aq but since 20% a week , nagtutubo lng po ako, peo ng nacompute ko from jan to june 116k na po nabayad ko.,, wala po ako pinipirmahan na kahit ano paper, la din po reciept na binibigay . ano po ba mgnda gawin tnx po

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