Dear Atty. Kathy,

I am trying to borrow money from my friend’s referred lender, to pay for the tuition fees of my children. The loan has an interest of 10 percent per month. I am trying to negotiate a lower interest rate because with the 10 percent monthly interest, I will end up paying more for interest than the actual amount I am borrowing. However, the lender is saying that the terms of the loan are final, especially considering that there is no specific period for me to pay back. Is the monthly interest of 10 percent allowed?

Azriel

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Dear Azriel,

The Supreme Court has decided in many cases that courts may strike down or reduce interest rates on loans when they are deemed unreasonable. Indeed, the Court acknowledges the freedom of the parties to enter into contracts and their obligation to comply with the terms and conditions, however, this freedom is not absolute. Where the stipulated interest is unconscionable or excessive, it is illegal and the Court may equitably reduce the interest as necessary.

Based on jurisprudence, interest rates of 3 percent per month or higher are excessive, iniquitous, unconscionable and exorbitant. Even if parties agree, such stipulations on unconscionable interest are void for being contrary to morals, if not against the law. Thus, if the unconscionable interest is open-ended and is applied for an indefinite period, such interest rate shall be invalidated and shall be reduced.

Based solely on your narration, the loan has a monthly interest of 10 percent, with no specifics as to the period of payment. In accordance with jurisprudence, this interest rate is outrageous and inordinate, and is void ab initio or invalid from the beginning.

With regard to what interest rate should apply when the stipulated interest is deemed unconscionable, the legal rate of interest is the presumptive reasonable compensation for borrowed money, which is 6 percent per annum.

In sum, since the 10 percent monthly interest is unconscionable, the same is not allowed and would be struck down by the Court, and should be substituted with the legal rate of interest of 6 percent per annum.

(Spouses Sergio D. Domasian, et al. versus Manuel T. Demdam, G.R. No. 212349, 17 November 2021)

Atty. Kathy Larios