Securing a loan in the Philippines can be a crucial step towards achieving your financial goals, whether it’s buying a home, starting a business, or covering unexpected expenses. However, understanding the intricacies of loan agreements is essential to make informed decisions and protect your rights. This guide will walk you through some fundamental aspects of loans based on legal principles in the Philippines.
What Exactly is a Loan?
At its core, a loan is a contractual agreement where one party (the lender) provides something of value to another party (the borrower). Philippine law distinguishes between two primary types of loans:
- Commodatum: This involves lending a non-consumable item (something that cannot be used up, like a car or a piece of furniture) for a specific period. The borrower is obligated to return the exact same item to the lender. Think of borrowing a neighbor’s ladder – you need to return that specific ladder. Ownership of the item remains with the lender. This type of loan is generally gratuitous, meaning without interest. It is perfected upon the actual delivery of the non-consumable thing.
- Mutuum (Simple Loan): This involves lending money or a consumable item (something that gets used up, like rice or fuel). The borrower is obligated to repay the lender with the same amount of the same kind and quality. For instance, if you borrow PHP 1,000, you need to return PHP 1,000. In this case, ownership of the money or consumable item transfers to the borrower. A mutuum can be either gratuitous (interest-free) or with interest. Like commodatum, it is perfected upon the delivery of the money or consumable thing.
It’s important to remember that a mere promise to provide a loan (either commodatum or mutuum) is binding, but the actual loan agreement is only considered perfected once the item or money is delivered to the borrower.
The Matter of Loan Interest
Interest is the cost of borrowing money. In the Philippines, the payment of monetary interest on a loan requires a clear and express stipulation in writing. This means that if there’s no written agreement specifying an interest rate, the lender generally cannot charge interest.
However, the law provides a fallback in the absence of a written agreement or if the stipulated interest rate is deemed unconscionable (excessive or unreasonable). In such cases, the interest rate will be the legal rate prescribed by the Bangko Sentral ng Pilipinas (BSP), applicable from the date of judicial demand (when a lawsuit is filed to collect the debt). For loans or forbearance of money, if there’s no stipulation or if the stipulated rate is unconscionable, the BSP rate applies from either judicial or extrajudicial demand (a formal demand made outside of court).
Under BSP Circular No. 799, series of 2013, the rate for loan or forbearance of money, goods, credits or judgments shall be six percent (6%) per annum, effective July 1, 2013, and the same rate is provided in BSP Circular No. 799 and aligned with Section 1 of the Usury Law. Unless stipulated in writing, the interest earned shall be 6% per annum
Courts have the power to reduce interest rates that are deemed excessive, iniquitous, unconscionable, or exorbitant. Always scrutinize the interest rate and any associated fees before agreeing to a loan.
Securing Your Loan: Real Estate Mortgage (REM)
For larger loans, especially those used for purchasing real estate, lenders often require collateral to secure the debt. A real estate mortgage (REM) is an accessory contract where a borrower pledges their real property (land and/or buildings) as security for the fulfillment of the principal obligation, which is usually the loan. If the borrower fails to repay the loan according to the agreed terms, the lender has the right to foreclose on the property to recover the1 outstanding debt.
It’s vital to understand the terms and conditions of a mortgage agreement, including the repayment schedule, interest rates, and foreclosure procedures.
Equitable Mortgage: When a Sale is Actually a Loan
Sometimes, what appears to be a sale of property might actually be a disguised loan agreement intended to secure a debt. This is known as an equitable mortgage. The law recognizes several indicators that can suggest a contract of sale is in fact an equitable mortgage, including:
- An unusually inadequate purchase price.
- The seller (who is actually the borrower) remaining in possession of the property as a lessee or otherwise.
- The seller being in urgent need of money.
- Other circumstances indicating that the real intention of the parties was to secure a debt.
Courts will look beyond the form of the contract to determine the true nature of the agreement and may treat a purported sale as an equitable mortgage, providing the “seller” (borrower) with certain rights, such as the right to redeem the property upon repayment of the debt.
Prohibited Practices in a Loan: Pactum Commissorium
Philippine law strictly prohibits a stipulation known as pactum commissorium. This is a provision in a mortgage agreement that automatically allows the mortgagee (lender) to acquire ownership of the mortgaged property upon the mortgagor’s (borrower) default. Such stipulations are considered void because they can lead to unjust enrichment of the lender. The proper procedure upon the borrower’s default is foreclosure, where the property is sold through a legal process, and any excess proceeds after satisfying the debt are returned to the borrower.
Dacion en Pago: An Alternative Way to Pay
Dacion en pago is a way for a borrower to extinguish a monetary debt by delivering and transferring ownership of a different thing to the creditor, provided the creditor accepts it as equivalent to the original obligation. For dacion en pago to be valid, three elements must be present:
- Performance of a different prestation: The borrower delivers something different from what was originally agreed upon (i.e., property instead of money).
- Difference between the prestation due and the substituted one: The thing delivered is not the exact same as the monetary debt.
- Agreement that the obligation is immediately extinguished: Both the borrower and the lender agree that the delivery of the new thing will fully settle the original debt.
Simply returning mortgaged property to the lender does not automatically constitute dacion en pago unless the lender explicitly accepts it as full payment of the loan.
Option to Buy in Mortgage Contracts
The validity of a contract granting the mortgagee an option to buy the mortgaged property in case of default is a complex legal issue with differing views. One perspective holds that such an option is valid if supported by the same consideration as the mortgage, essentially acting as a continuing offer that the mortgagee can accept upon the mortgagor’s default. However, another view considers such an option as a veiled form of pactum commissorium and therefore prohibited. Due to this ambiguity, it’s crucial to seek legal advice if you encounter such a provision in a loan or mortgage agreement.
Perfection of the Loan Agreement
As mentioned earlier, a loan agreement, whether commodatum or mutuum, is perfected upon the delivery of the object of the contract – the non-consumable thing in commodatum or the money/consumable thing in mutuum. This means that until the lender actually hands over the item or funds to the borrower, the loan agreement is not yet fully in effect.
Sources of Loan in the Philippines
- Bank Personal Loans
- Pagibig loans: Calamity, Housing and Personal Loans
- SSS Loan
- Gcash Loans: Loan and GGives
- Maya Loans
- Shopee Loans, SeaBank
- Home Credit Loan: Qwarta
- Tala Loan
Conclusion
Understanding the different types of loans, the rules governing interest, the nature of security like real estate mortgages, and related concepts like dacion en pago and pactum commissorium is vital for anyone considering taking out a loan in the Philippines. By being informed about your rights and obligations, you can navigate the lending landscape more confidently and make choices that align with your financial well-being. Always remember to read loan agreements carefully and seek legal advice if you have any doubts or concerns.
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