I. Overview

Monthly interest is the language of most Philippine loans—whether from banks, lending companies, pawnshops, online lenders, or informal “5–6” arrangements. But many disputes arise because:

the monthly rate is not clearly written in the contract;
the lender later “assumes” or asserts a rate that is higher than what appears on paper;
the effective monthly rate (after “fees,” penalties, and compounding) becomes oppressive or unconscionable.

This article explains, in Philippine law, how and when a borrower (or their counsel) can attack or question assumed monthly interest rates in loan contracts: the legal basis, typical arguments, and practical strategies.

Note: This is general legal information, not a substitute for advice from a lawyer handling a specific case.

II. Core Legal Framework on Interest

1. Civil Code: Interest must be in writing

Article 1956, Civil Code:

“No interest shall be due unless it has been expressly stipulated in writing.”

Key implications:

No written stipulation → no conventional interest If the contract or promissory note does not clearly stipulate interest in writing, the lender cannot legally charge conventional interest (whether monthly or annual), no matter what was allegedly agreed verbally.
Ambiguity is fatal to the lender’s claim If the written stipulation is vague, incomplete, or inconsistent with other documents, the borrower can argue that there is no valid stipulation of interest, or that it should be interpreted in the least burdensome way to the borrower.
Interest is exceptional, not presumed The law treats interest as an exception to the rule of full repayment of principal only. That is why clear written consent is required.

2. Usury Law and the lifting of ceilings

Usury Law (Act No. 2655) originally set maximum interest rates.
Central Bank (now BSP) Circular No. 905 (1982) effectively lifted the ceilings, allowing parties to agree on interest rates freely.

But:

The Supreme Court has consistently held that even after the usury ceiling was lifted,
- interest rates may still be reduced when they are “unconscionable” or “excessive”, based on equity and public policy.
The Court has repeatedly struck down interest rates like 5% per month (60% p.a.) or 6% per month (72% p.a.) as unconscionable and reduced them to reasonable levels.

So: the absence of a statutory ceiling does not give lenders unlimited freedom.

3. Legal / judicial interest

Even if contractual interest is invalid, courts may still order “legal interest” on amounts due, especially from the time of judicial or extrajudicial demand. Current doctrine (following landmark decisions) generally:

6% per annum as legal interest (not per month),
Applied from date of default or judicial demand, depending on the nature of the obligation.

This is crucial when disputing a high monthly rate: If the contractual rate is void, the fallback is often 6% per annum, not the lender’s claimed monthly rate.

4. Truth in Lending and consumer protection

Philippine law also imposes disclosure duties on creditors:

Truth in Lending Act (RA 3765) Requires creditors to clearly and conspicuously disclose to the borrower:
- the finance charge,
- the annual percentage rate (APR), and
- other key loan terms.
Consumer Act of the Philippines (RA 7394) and related regulations Protect consumers against deceptive and unconscionable sales/credit practices.
Special laws and regulations on banks, financing companies, and lending companies (e.g., those under BSP and SEC) also require clean disclosure of interest and other charges.

Non-compliance with these disclosure rules can:

Cause administrative liability for the lender, and
Support a judicial argument that hidden or assumed interest rates should not be enforced.

III. Understanding “Monthly Interest” in Practice

1. Monthly interest as a rate vs. monthly installments

In Philippine practice, “monthly” can refer to:

Monthly interest rate – e.g., “3% per month”
Monthly installment amount – the total payment per month (principal + interest)
Compounding frequency – interest charged or capitalized monthly

A lender might later claim a monthly interest rate that is not plainly stated in the contract, arguing that it is embedded in the amortization schedule or in “standard practice.” This is where disputes arise.

2. Effective interest vs. nominal interest

A contract might say, for example:

“2.5% monthly interest” but also impose:
- service fees,
- documentation fees,
- processing fees,
- penalty interest, and
- other “charges” deducted upfront or added to the balance.

The effective monthly interest rate can be far higher than 2.5%, especially if:

fees are deducted from the principal, but interest is computed on the full face value of the loan;
penalties are stacked on top of interest.

Even if the stated monthly rate seems mild, the real cost of credit may be oppressive.

IV. What Are “Assumed” Monthly Interest Rates?

“Assumed” monthly interest typically arises when:

The contract is silent on the exact rate, but the lender:
- later computes interest as if there were a particular monthly rate, or
- uses internal policies to “fill in the blank.”
The written contract mentions only “prevailing rates” or “subject to the lender’s rates,” without specifying the rate in clear figures.
Multiple documents conflict – e.g.,
- The promissory note states “18% per annum,”
- but the billing statement computes using “2% per month” or a much higher rate.
The lender’s system or policy auto-applies a standard rate (e.g., 4% per month) even if the client’s documents are incomplete or inconsistent.
Online / mobile app loans where the interface shows only a “monthly payment” without clearly breaking down the interest rate and fees. Later, the lender retroactively computes a high monthly rate.

In such cases, the borrower can attack the lender’s “assumption” as unsupported by the written stipulation, contrary to Art. 1956 and to disclosure rules.

V. Legal Grounds to Dispute Assumed Monthly Interest Rates

Ground 1: Absence or insufficiency of a written interest stipulation

Key rule: No interest is due if not expressly stipulated in writing.

Arguments for the borrower:

No clear rate = no conventional interest
- If the contract does not identify a specific rate (e.g., “2% per month”, “24% per annum”), the lender cannot simply assume one.
- Generic phrases like “with interest at prevailing rates” or “with interest as may be imposed by the lender” are vulnerable.
Ambiguity is construed against the lender
- Civil Code’s rule on interpretation of contracts: provisions are read against the party who drafted them (typically the lender).
- If the monthly rate is not clearly indicated or inconsistent among documents, the court may:
  - adopt the lower rate, or
  - strike out the stipulation entirely and apply only legal interest.
Oral agreements are irrelevant
- Even if the lender insists “we agreed verbally on 5% per month,” that is legally insufficient under Art. 1956 absent a clear written stipulation.

Result: The assumed monthly interest can be rejected, and only legal interest (e.g., 6% p.a.) may be imposed.

Ground 2: Excessive or unconscionable interest

Even when there is a written monthly rate, the borrower may argue:

The rate is so high that it becomes unconscionable and contrary to morals, good customs, and public policy.

Examples where courts have found rates unconscionable in past cases include:

5% per month / 60% per annum
6% per month / 72% per annum

The Supreme Court has:

struck down such rates, describing them as “excessive and iniquitous” or “shocking to the conscience,” and
reduced them to a reasonable figure, often 12% per annum (in older cases) or 6% per annum in more recent doctrine, depending on the period and nature of the obligation.

Borrower’s arguments may emphasize:

Gross disparity with market rates Compare the contractual monthly rate with typical bank lending rates in the same period.
Borrower’s weak bargaining power
- Urgent need (medical expenses, poverty, etc.)
- Contract of adhesion (take-it-or-leave-it)
- Limited education or financial literacy.
Layering of fees and charges Even if the “headline” rate is moderate, the effective rate may be oppressive because of:
- upfront deductions,
- mandatory add-ons (insurance, service fees),
- severe penalties.
Public policy and social justice Courts often speak of the need to protect borrowers from predatory lending practices.

Result: The court may reduce the monthly rate to a more reasonable level or replace it with the legal interest rate.

Ground 3: Unilateral escalation and “prevailing rate” clauses

Many Philippine loans, especially with banks and financing companies, include clauses such as:

“The bank may increase or decrease the interest rate at its sole discretion depending on the prevailing market rates.”

Problems with such clauses:

Unilateral power without standards
- If the lender can increase the rate unilaterally and without clear basis, courts have treated this as invalid or subject to strict scrutiny.
Lack of notice or consent
- Even if an escalation clause exists, lenders are generally expected to:
  - notify the borrower of any rate increase, and
  - obtain at least implied consent, e.g., by the borrower’s continued availment or payment with knowledge.
No de-escalation or downward adjustment
- If the clause allows only upward adjustments, courts have, in prior rulings, criticized such “one-way” clauses as unconscionable.

Borrower’s counter:

The assumed new monthly rate (after alleged escalation) is invalid unless:
- clearly provided in the contract,
- notified to the borrower, and
- accepted by the borrower.

Result: Courts may disregard the escalated rate, and apply:

the original rate,
or a judicially determined reasonable rate.

Ground 4: Hidden charges and deceptive structuring

Assumed monthly interest may be embedded in:

“service charges,”
“processing fees,”
“notarial fees,”
“collection fees,”
“rebates,” or
“penalty interest” that kicks in almost immediately.

These can disguise a very high effective monthly interest.

Legal tools:

Truth in Lending Act & BSP/SEC rules
- Non-disclosure or misleading disclosure of the true cost of credit may be considered deceptive practice.
- Regulatory agencies may sanction the lender; courts may factor this in when reducing interest.
Consumer Act
- Prohibits unfair or unconscionable sales acts and practices.
- A loan agreement that grossly favors the lender at the expense of the borrower can fall under this.

Argument:

The lender’s computation of a high monthly interest rate is tainted by non-compliance with disclosure rules and unfair structuring, so it should not be enforced.

Ground 5: Interest on interest and penalties

Another frequent issue:

Lenders charge interest on unpaid interest or penalty interest that is almost as high as—or higher than—the original rate.

Civil Code rules:

Interest on interest (anatocism) requires a separate written agreement and usually only after interest has become due and unpaid.
Penalty clauses may be reduced by courts when they are iniquitous or iniquitous combined with high interest.

So if a lender:

compounds interest monthly without a clear, written agreement, or
piles on penalties so that the effective monthly charge is extreme,

the borrower can argue that:

The assumed compounded monthly rate is invalid; and
Penalties and interest must be reduced or disallowed.

VI. Procedural Avenues to Dispute the Interest

1. Before litigation: Negotiation and regulatory complaints

Borrowers (or counsel) can:

Send a demand letter
- Contest the lender’s computation.
- Ask for a detailed breakdown: principal, interest, fees, and penalties.
- Assert the applicable legal doctrines: Art. 1956, unconscionability, disclosure rules.
File a complaint with regulators, depending on the type of lender:
- Bangko Sentral ng Pilipinas (BSP) – for banks and quasi-banks.
- SEC – for lending companies and financing companies.
- Other agencies, such as the DTI or local government units, for certain traders or microfinancers.

Even if regulators do not recompute the loan themselves, their findings can be powerful evidence in a later judicial case.

2. When the lender sues for collection

Often, the issue arises when the lender files a collection case (e.g., “sum of money”) and claims:

principal +
a specific assumed monthly interest rate +
compounded interest +
penalties.

Borrower’s typical responses:

Answer with defenses and counterclaim
- Deny the validity of the alleged interest rate.
- Assert that:
  - there is no written stipulation, or
  - the rate is unconscionable and should be reduced.
Ask for re-computation
- Pray that the court:
  - determines the valid interest rate under the law, and
  - orders a new computation of the borrower’s obligation.
Raise violation of disclosure and consumer laws
- Argue that non-disclosure of the true cost of credit supports:
  - reduction of interest,
  - denial of penalties, and
  - possible moral/exemplary damages in extreme cases.
Invoke partial payments and receipts
- Present receipts or transaction records to show that the borrower has, in fact, already paid much more than the valid principal plus reasonable interest.

3. When the borrower is the plaintiff

Borrowers may also initiate cases themselves, such as:

Complaint for nullity or reformation of contract,
Complaint for specific performance with prayer for re-computation, or
Petition questioning foreclosure, arguing that:
- the lender’s claim is based on invalid interest and penalties, and
- the supposed “default” was triggered only by inflated computations.

VII. Evidence and Computation Issues

To effectively challenge assumed monthly interest, a party should gather:

Loan documents
- Promissory notes
- Loan agreements
- Disclosure statements
- Mortgage or pledge contracts
Updates and billing records
- Statements of account
- Demand letters
- Printed or digital billing notices
Payment records
- Official receipts
- Deposit slips
- Electronic transfer confirmations
Regulatory correspondence, if any
- Replies from BSP, SEC, or other agencies
- Investigation results or advisory letters
Expert computations (if needed)
- Comparative computations using:
  - the lender’s assumed rate,
  - a reasonable monthly rate, and
  - the legal interest rate.

A clear spreadsheet or computation summary attached to the pleading can help the court see:

how much of the lender’s claim is unsupported by a valid stipulation, and
what amount would be due under valid rates.

VIII. Drafting and Argument Strategy (for Counsel)

1. Core allegations

In pleadings, counsel often:

Identify the exact stipulation (or lack thereof) on interest.
Highlight ambiguity or absence of a specific monthly rate.
Compare the documents (note, mortgage, disclosure statement, SOA) to show inconsistency.
Compute the effective rate and show why it is unconscionable.
Invoke the key doctrines:
- Art. 1956 (written stipulation required),
- court’s power to reduce unconscionable interest and penalties,
- protection under Truth in Lending and consumer laws.

2. Prayer for relief

Typical prayers in relation to interest include:

Declaration that:
- the assumed monthly interest rate is void or inapplicable;
- only principal plus legal interest should be paid.
Re-computation of the loan obligation based on:
- a lower rate (e.g., 6% per annum), or
- simple interest instead of compounded.
Cancellation or reduction of:
- penalty charges,
- interest on interest, and
- undisclosed fees.
In extreme cases:
- moral and/or exemplary damages,
- attorney’s fees.

IX. Practical Tips for Borrowers and Practitioners

Always ask: “Where is the rate written?” If the lender asserts “4% per month” but the contract does not clearly say so, that’s a red flag.
Get a breakdown of the computation. Demand a written computation showing how the lender arrived at the total obligation.
Compare documents. Differences between the promissory note, mortgage contract, and disclosure statement can be used to challenge the lender’s assumptions.
Watch out for compounding and penalties. Sudden ballooning of the loan may be due to:
- interest on interest, or
- high penalties that are subject to reduction.
Document all payments. Keep receipts and transaction records; they may prove that the borrower has already satisfied their obligation under a lawful rate.
Consider early consultation. Legal issues about interest are complex. Consulting a lawyer early—before signing or early in the dispute—can prevent future problems.

X. Conclusion

In Philippine law, monthly interest rates cannot be casually assumed by lenders:

They must be clearly written, or they are not due at all.
Even when written, excessive or unconscionable monthly rates—especially when compounded with penalties and hidden charges—can be reduced by the courts.
Disclosure laws and consumer protection rules further constrain lenders and support borrowers who challenge unfair computations.

Disputing an assumed monthly interest rate is not merely a matter of arithmetic; it is a legal and equitable question. With a proper understanding of the Civil Code, judicial doctrines, and regulatory requirements, borrowers and their counsel can ensure that only fair and lawful interest is ultimately enforced.