Dear Atty. Joji,

Because of expenses this holiday season, I obtained a loan from a private individual. The loan carries an interest of 42 percent per year. While I am doing my best to pay on time to avoid default, the interest has made repayment extremely difficult. Is such a rate legally acceptable, or can it be questioned for being excessive?

Marea

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Dear Marea,

The Supreme Court stressed in a recently decided case that loan agreements, in particular, allow contracting parties to depart from the legal interest rate, but any deviation must be reasonable and fair. While there is no numerical limit on conscionability, a rate of 3 percent per month or 36 percent per annum is three times more than the 12 percent legal interest rate and, therefore, considered excessive and unconscionable. Moreover, the debtor’s willingness to assume an unconscionable interest rate is inconsequential to its validity.

In Chua v. Timan, the Court declared that stipulated interest rates ranging from 3 percent per month and higher are excessive, unconscionable, and void for being contrary to morals, if not against the law. Although Central Bank of the Philippines Circular No. 905-82 has effectively removed the interest ceilings prescribed under the Usury Law, still, lenders may not impose interest rates that would enslave the borrowers or hemorrhage their assets.

“Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The unconscionable interest rate is therefore, nullified and is deemed not written in the contract of loan. xxx Note however that only the EIR and stipulated interest rates and penalties are declared void for being unconscionable. The very nature of the parties’ contract of loan entitles debtor to recover not only the principal amount, but also the payment of monetary interest from the respondents, as compensation for the use of the borrowed amount. Based on Article 1420 of the Civil Code, respondents’ obligation to pay the principal and the interest subsists as this can be separated from the void interests rates and charges.” (Manila Credit Corp. v. Viroomal, G.R. No. 258526, [11 January 2023])

As such, even though contract that is freely executed has the force of law between the parties, this time-honored principle of autonomy in contracts is, however, not absolute. It is balanced by the governing rule in Article 1306 of the Civil Code which declares that parties may not stipulate on matters which are contrary to law, morals, good customs, public order, or public policy.

Hope this helps.

 Atty. Joji Alonso