Interest rates may be voided if it is unconscionable
DearPAO, IborrowedP1,000,000fromElvis in2016payableintwoyearswith 7.5percentmonthlyinterest.SinceI amindireneedoffund,Iobtained anotherloanfromhimaftersix monthsintheamountofP800,000 ,whichispayableinoneyearwith sameinterestrate.Ifailedtomeet myobligations;hence,Italkedto Elvisifhecanwaivetheinterestbut herefusedandclaimedthatIvoluntarily loanwithhim;thus,thereisnoreason andconditions.Hefurtherstated thatthereisnolongeralimitation withrespecttointerestrates;thus, thepartiestoacontractcanagree onanyrate.Isthiscorrect?
Shanon
Dear Shanon,
Elvis is partly correct on his claim that the parties may stipulate on any interest rate in a loan agreement. This is because of the suspension of CentralBankCircular905Seriesof 1982, which regulates interest rates on loans or forbearance of money, goods or credit. Further, this is also in accordance with Article 1306 of the New CivilCodeofthePhilippines, which states that“the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”
The only limitation for the contracting parties in a contract of loan with respect to interest rate is if the rate agreed upon will be in contravention to law, morals, good customs, public order or public policy.
In this regard, please be guided by the decision of the court in the case of Rey vs. Anson (GR No. 211206, Nov. 7, 2018), where the Supreme Court, through Associate Justice Diosdado Peralta, stated that:
“In Sps. Albos v. Sps. Embisan, et al., the Court held:
As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. Summarizing the jurisprudential trend towards this direction is the recent case of Castro v. Tan in which We held: While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective Jan. 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v. Court of Appeals, we annulled a stipulated 5.5 percent per month or 66 percent per annum interest on a P500,000 loan and a 6 percent per month or 72 percent per annum interest on a P60,000 loan,respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals, we declared a 3 percent monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12 percent per annum.”
Applying the above-quoted decision in your situation, the 7.5 percent monthly interest rate which you voluntarily agreed upon is considered to be excessive or contrary to morals; hence, it is void. At present, the legal interest for the loan or forbearance of money, in the absence of stipulation, shall now be 6 percent per annum (BSP CircularNo.799Seriesof2013effective
We hope that we were able to answer your queries. This advice is based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.
Editor’snote:DearPAOisadaily columnofthePublicAttorney’sOf-