Dear PAO,

Four months ago, I was unexpectedly laid off from work and have been actively looking for another job since. However, even that can be costly. Out of sheer desperation, I was compelled to borrow money from a microfinance company that offers quick and easy cash loans, certain that I would find new employment by the time the debt falls due. Sadly, that has not been the case. I have taken several part-time jobs to get by, but just when I think I have saved enough to settle the full debt amount, I am confronted with the twenty percent monthly interest, which continuously adds to my loan balance. I can no longer keep up, it’s as if all the money I manage to put aside goes toward payment of my debt, and yet, somehow, I am still unable to settle it fully. I have tried negotiating with the lending company, but they refused to reduce the interest rate, insisting that I had full knowledge of the terms when I consented to the loan. I am thinking of taking another loan with a lower interest rate just to pay this off. What else can I do?

Charlie

Dear Charlie,

Generally, the parties to a loan agreement are free to stipulate the interest rate on their loan contract. This is pursuant to Article 1306 of the New Civil Code of the Philippines, which provides that “[t]he 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.”

By virtue of Central Bank of the Philippines Circular 905-82 dated Dec. 10, 1982, the interest rate ceiling on loans or forbearances of money, goods or credits previously prescribed under Act 2655, otherwise known as the “Usury Law,” has been effectively suspended. This means that the parties to a loan agreement are given wide latitude to fix any interest rate they deem convenient. Once agreed upon, the parties thereto are bound to fulfill what has been expressly stipulated. (Article 1315, New Civil Code of the Philippines).

However, the discretion given to the parties is not absolute. Aside from the conditions laid down in Article 1306 of the New Civil Code, Article 1956 of the same Code categorically provides that “[n]o interest shall be due unless it has been expressly stipulated in writing.” In the same vein, the removal of the interest rate ceiling prescribed under the Usury Law does not give creditors unbridled license to impose exorbitant rates. Ultimately, lenders may still not impose interest rates that would “enslave borrowers or hemorrhage their assets.” (Manila Credit Corp. vs. Ramon S. Viroomal, et al., GR 258526, Jan. 11, 2023, Ponente: Associate Justice Mario V. Lopez).

In determining the conscionability of interest rates, the courts take into account “the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.” (Ileana Macalinao vs. Bank of the Philippine Islands, GR 175490, Sept. 17, 2009, Ponente: Associate Justice Presbitero Velasco Jr.) Once determined to be unconscionable, immoral or oppressive, our courts may equitably reduce interest rates into the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas (BSP), which is currently set at 6 percent per annum.

The inherent authority of the courts to reduce exorbitant interest rates is largely anchored on Articles 1229 and 2227 of the New Civil Code, which respectively provide that “[t]he judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable,” and “[l]iquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.”

In your case, assuming that the interest rate imposed on your loan had been aptly reduced into writing, said rate albeit previously agreed upon by you, may still be disputed as it appears excessive under the circumstances.

In De La Paz vs. L & J Development Co. (GR 131622, Nov. 27, 1998), the Supreme Court, through Associate Justice Mariano Del Castillo, reduced a 6-percent monthly interest rate to a more reasonable 6 percent per annum, stating that charging 6 percent monthly or 72-percent interest per annum is “definitely outrageous and inordinate.” Applying the foregoing standard to your case, an interest rate of 20 percent per month, which is equivalent to 240 percent per annum, would likely be found unconscionable as well.

Accordingly, you may pursue remedies through judicial action to nullify or reduce the exorbitant rate, or you may seek recourse by filing administrative complaints before regulatory bodies such as the BSP, or Securities and Exchange Commission, should the subject microfinance company be a duly registered lending institution.

We hope that we are 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.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected].