Introduction

In the Philippines, lending practices are governed by a mix of civil law principles, special laws, and regulations from agencies like the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC). One of the most contentious issues in lending is the imposition of unconscionable interest rates — rates so excessive that they shock the conscience and exploit borrowers, often under circumstances of financial desperation. This article explores the legal framework surrounding interest rates, what constitutes unconscionability, and how borrowers can challenge predatory loans under Philippine law.

Legal Basis on Interest Rates in the Philippines

1. Usury Law and Its Suspension

The Usury Law (Act No. 2655) once imposed strict limits on interest rates. However, Central Bank Circular No. 905 (1982) effectively suspended the ceiling on interest rates, allowing parties to agree freely on any rate. Despite this, the suspension did not legalize unconscionable or iniquitous rates. Courts retain the power to reduce or nullify interest rates that are deemed excessive or contrary to morals, public policy, or good customs.

2. Civil Code Provisions

Several provisions of the Civil Code of the Philippines remain applicable:

Article 1306 – Parties may establish stipulations as long as they are not contrary to law, morals, good customs, public order, or public policy.
Article 1956 – No interest shall be due unless expressly stipulated in writing.
Article 1229 – Courts may equitably reduce penalties or damages if they are iniquitous or unconscionable.

These provisions provide the foundation for judicial intervention against abusive loan terms.

What Are “Unconscionable” Interest Rates?

An unconscionable interest rate is one that is grossly excessive and shocks the conscience of the court, especially when imposed on borrowers who have little bargaining power. Philippine jurisprudence provides numerous examples:

In Medel v. Court of Appeals (G.R. No. 131622, November 27, 1998), a 66% annual interest rate was declared unconscionable and reduced to 12% per annum.
In Spouses Castro v. Tan (G.R. No. 168940, June 8, 2006), an interest rate of 7% per month (84% per annum) was deemed excessive and reduced by the Court.
In Chua v. Timan (G.R. No. 187987, November 12, 2014), the Supreme Court reiterated that freedom to contract is not absolute and cannot justify oppression.

Courts assess unconscionability based on context—including the borrower’s vulnerability, the lender’s dominance, and prevailing market rates.

Regulatory Oversight

1. Bangko Sentral ng Pilipinas (BSP)

The BSP regulates banks, quasi-banks, and other financial institutions. While it no longer sets fixed ceilings on interest rates, it monitors lending practices to ensure fairness and transparency under the Financial Consumer Protection Act (Republic Act No. 11765). Lenders must disclose all finance charges, penalties, and effective interest rates.

2. Securities and Exchange Commission (SEC)

For non-bank lending companies and financing institutions, the SEC enforces compliance under Republic Act No. 9474 (Lending Company Regulation Act of 2007) and Republic Act No. 8556 (Financing Company Act of 1998). The SEC has sanctioned online lending platforms for harassment, overcharging, and failure to disclose true costs.

3. Department of Trade and Industry (DTI)

The DTI may also act under the Consumer Act (R.A. 7394) when deceptive or abusive loan practices affect consumers, particularly in retail credit or installment sales.

How to Challenge Predatory or Unconscionable Loans

Borrowers who believe they are victims of predatory lending have several remedies:

1. Judicial Action

A borrower may file a civil case for:

Annulment or reformation of contract, if consent was vitiated by fraud, undue influence, or mistake.
Reduction of interest rates, invoking the courts’ equitable powers under Article 1229 and relevant jurisprudence.
Damages, if the lender’s actions constitute bad faith or harassment.

The courts may declare the excessive interest void and replace it with a reasonable rate, often 12% per annum before July 1, 2013, or 6% per annum thereafter, following Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013).

2. Administrative Complaint

Borrowers may file complaints with:

BSP Consumer Assistance Center, for issues involving banks and credit card issuers.
SEC Enforcement and Investor Protection Department, for lending and financing companies.
DTI Fair Trade Enforcement Bureau, for consumer loan abuses.

3. Cease and Desist Orders and Penalties

The SEC and BSP can issue cease and desist orders against violators, suspend licenses, and impose fines. In extreme cases, criminal charges for estafa or unfair trade practices may arise.

The Role of the Supreme Court in Protecting Borrowers

Philippine jurisprudence reflects a consistent judicial stance that the suspension of the Usury Law does not grant lenders unlimited discretion. The courts continue to moderate abusive practices through equitable reduction of interest and penalty rates. The judiciary serves as a moral gatekeeper, ensuring that contracts remain instruments of justice rather than exploitation.

Practical Tips for Borrowers

Always request full disclosure of the effective interest rate (EIR), including penalties and hidden charges.
Read the fine print and never sign blank or incomplete documents.
Keep all records of payments, receipts, and communications.
Report abusive lenders to the BSP, SEC, or DTI.
Seek legal advice early, especially when interest rates exceed reasonable market levels (typically above 36% per annum in consumer lending).

Conclusion

While the Usury Law has been suspended, unconscionable interest rates remain illegal under Philippine law. Courts and regulators maintain the authority to strike down or adjust oppressive loan terms that exploit the poor or uninformed. Borrowers must be aware of their rights and the remedies available to challenge predatory lending practices. In essence, freedom to contract does not equate to freedom to exploit — fairness, good faith, and public policy continue to guide the law of lending in the Phil