Borrowing money is a common practice in the Philippines, whether through banks, financing companies, or online lending platforms (OLPs). However, many Filipinos find themselves trapped in a cycle of debt due to skyrocketing late payment fees. While lenders have the right to impose penalties for breach of contract, these charges are not without legal limits.
The Legal Framework: Freedom of Contract vs. Equity
Under the Civil Code of the Philippines, parties are generally free to establish such stipulations, clauses, terms, and conditions as they may deem convenient (Article 1306). This includes "Liquidated Damages" or penalty clauses intended to substitute for indemnity for damages and the payment of interests in case of non-compliance (Article 1226).
However, this freedom is not absolute. The same article states that these stipulations must not be contrary to law, morals, good customs, public order, or public policy.
The Doctrine of "Unconscionable" Interest and Penalties
While the Philippines currently has no "Usury Law" (the law capping interest rates was suspended in 1982 by Central Bank Circular No. 905), the Supreme Court of the Philippines has consistently ruled that lenders do not have a "blanket authority" to hike rates to levels that enslave the borrower.
When is a fee "Unconscionable"?
The Supreme Court has repeatedly struck down interest rates and penalty charges that are deemed "iniquitous, unconscionable, and exorbitant."
- The Threshold: While there is no fixed percentage in the law, jurisprudence (court rulings) often finds combined rates (interest + penalty) exceeding 3% per month (36% per annum) to be excessive, depending on the circumstances.
- The Effect: When a court finds a rate unconscionable, it does not void the entire loan. Instead, the court judicially reduces the rate to a "fair and equitable" level—often the prevailing legal rate of 6% per annum for the penalty or interest component.
"Stipulated interest rates of 3% per month and higher have been consistently struck down by the Supreme Court for being contrary to morals, if not against the law." (Medel vs. Court of Appeals)
Regulatory Protections for Borrowers
Beyond the Civil Code, specific government agencies regulate how much lenders can charge:
1. Bangko Sentral ng Pilipinas (BSP) Circular No. 1133
In response to the rise of predatory lending, the BSP issued rules capping interest and fees for low-value, short-term loans (often offered by OLPs):
- Nominal Interest Rate: Capped at 6% per month (approx. 0.2% daily).
- Late Payment Fees: Capped at 1% per month on the outstanding unpaid amount.
- Total Cost Cap: The total interest, fees, and charges cannot exceed 100% of the principal amount borrowed.
2. Truth in Lending Act (Republic Act No. 3765)
Lenders are required to provide a Disclosure Statement before the loan is consummated. This document must clearly state:
- The cash price/principal.
- The finance charges (interest, service fees).
- The default or late payment charges. Failure to disclose these clearly can result in the lender being unable to collect those specific fees and may subject them to penalties.
Common Red Flags of Illegal Fees
- Compound Penalties: Charging interest on the penalty itself.
- Hidden Fees: Charges that were not in the signed Disclosure Statement.
- "Pre-deducted" Penalties: Fees taken out of the loan principal before you even receive the money.
- Automated Escalation: Penalties that double every few days without a reasonable ceiling.
Legal Remedies for Borrowers
If you believe you are being charged unconscionable fees, you have several courses of action:
- Request for Restructuring: Ask the lender in writing to waive the excessive penalties and offer a more realistic payment plan. Mention relevant Supreme Court cases (e.g., Medel vs. CA or Lara’s Gifts & Decors, Inc. vs. PNB).
- File a Complaint with the SEC: If the lender is a Financing or Lending Company (including most lending apps), file a formal complaint with the Securities and Exchange Commission (SEC) for violations of the Truth in Lending Act or BSP caps.
- File a Complaint with the BSP: If the lender is a bank or an entity supervised by the BSP, use their Consumer Assistance Mechanism (CAM).
- Judicial Redress: If a lender sues you for collection, you can raise the defense that the charges are "unconscionable and void." The court has the power to reduce the amount to a legal and fair level.
Summary Table: Interest and Penalty Limits
| Charge Type | General Rule | Regulatory Cap (for Small/Short-term Loans) |
|---|---|---|
| Interest Rate | Must be "reasonable" | 6% per month |
| Late Fees | Must not be "unconscionable" | 1% per month |
| Total Fees | No specific ceiling in Civil Code | 100% of the Principal |
Conclusion
While the law expects borrowers to honor their obligations, it also protects them from predatory practices that turn a small debt into a lifetime of financial ruin. If a late payment fee feels like a "punishment" rather than a "compensation for delay," it is likely unconscionable and legally contestable.
Would you like me to draft a formal letter of request to a lender asking for the reduction of excessive late fees based on these legal principles?