Lex Rex Ph

What does the law say about excessive interests?

The Usury Law has been lifted by CB Circular 905, so technically there is no more such thing as usurious interest by virtue of the Usury Law, but because of Civil Code Art 8 “Judicial decisions… shall form a part of the legal system of the Philippines”, there are interest rates that are considered “unconscionable, exorbitant, and excessive interests.

Note: Usury is the charging of “excessive or exorbitant” interest rates.

The Supreme Court said that such a circular does not grant lenders a carte blanche authority to raise interests that will enslave their borrowers and lead to the hemorrhaging of their assets.

  • usury is the exaction of excessive interest.

However, this circular does not grant lenders carte blanche authority to enslave their borrowers and lead to the hemorrhaging of their assets. (Solangon vs Salaza) (Imperial vs Juacian)

Effect: No longer usurious but “outrageous, inordinate, unconscionable, exorbitant, excessive”

The courts may still (1) declare an interest rate illegal, and (2) reduce the same as equity and reason demand if it is “unconscionable, exorbitant, and excessive” (Imperial vs Juacian) or when it is contrary to morals or “iniquitous”. (Cathay Finance vs. Gravador)

Reduce or substitute with legal rate

“Reduce” or the legal rate of interest will be the substitute not only for the one-year interest period agreed upon but for the entire period that the loan of the debtor remains unpaid.

The legal rate of interest shall be applied from the execution of the contract of the loan until full payment.

No exculpation or effect on obligation to pay principal amount

The existence of unconscionable interest does not affect the debtor’s obligation to pay the principal loan.

Examples of excessive interests

In several cases, the Court found the following rates excessive and reduced the same:
(8 cases)

  • 66% per annum to 12% – Medel vs. Cruz
  • 36% per annum to 12% – Ruz vs. CA
  • 72% per annum to 12% – Solangon vs. Salazar
  • 120% per annum to 12% – Cuaton vs. Salud
  • 192% per annum to 14% – Imperial vs. Juacian
  • 84% per annum to 18% – Arrofo vs. Quino
  • 72% per annum to 12% – Carpo vs. Chua
  • 5% compounded monthly to 12% – (Castro vs DeLeonTan)
  • The highest reduced rate so far is 24% – Macalinao vs. BPI

Legal rate of interest

The current legal interest rate now is 6% per annum. (BSP Circular No. 799)

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