I. Overview

Car ownership in the Philippines is often financed through car loans granted by banks, financing companies, and lending companies. When a borrower falls behind on payments, the account may be endorsed to internal collections, external collection agencies, or lawyers. At that point, borrowers are frequently confronted with “collection fees”, “penalty charges”, “attorney’s fees”, and other add-on costs that can dramatically increase the amount claimed.

This article explains, in the Philippine legal context:

What “collection fees” and related charges are
The legal framework that governs them
When they are valid and when they may be considered excessive or unconscionable
How a borrower can dispute such fees, in negotiations and before regulators or the courts

It is general information, not a substitute for specific legal advice on a particular case.

II. Legal Framework

Several laws and legal principles shape the rules on collection fees in delayed car loans:

Civil Code of the Philippines
- Governs obligations and contracts (Articles 1156 onwards).
- Permits parties to agree on interest, penalty charges, and liquidated damages, but limits them when they become iniquitous or unconscionable.
- Key provisions:
  - Article 1306 – Freedom to stipulate terms so long as they are not contrary to law, morals, good customs, public order, or public policy.
  - Article 1229 – Courts may reduce the penalty agreed upon by the parties if it is iniquitous or unconscionable.
  - Article 2227 – Courts may equitably reduce liquidated damages if they are iniquitous or unconscionable.
  - Articles 19, 20, 21, 26 – General provisions on acting with justice, good faith, and respect for human dignity; used against abusive collection practices and public shaming.
Usury Law and Interest Ceilings
- The old Usury Law (Act No. 2655) set interest ceilings, but these were effectively lifted by Monetary Board issuances in the 1980s.
- Result: no fixed legal maximum interest rate, but the Supreme Court has consistently ruled that excessive interest, penalties, and charges can be voided or reduced for being unconscionable, especially in consumer loans.
- The same reasoning is used to cut down very high collection/penalty fees.
Truth in Lending Act (Republic Act No. 3765)
- Requires creditors to clearly disclose the true cost of credit, including:
  - Interest rate
  - Other finance charges
  - Fees and penalties
- Typically implemented through a Disclosure Statement given to the borrower upon release of the loan.
- Hidden or inadequately disclosed fees can be challenged as violations of this law and of basic fairness.
Consumer Act of the Philippines (RA 7394)
- Prohibits unfair or unconscionable sales acts or practices, such as:
  - Taking advantage of a consumer’s lack of education or financial capacity
  - Excessive or grossly unjust contractual terms
- While car loans are often financial transactions rather than outright “sales”, consumer protection principles influence how regulators and courts treat oppressive fee structures.
Financing and Lending Regulations
- Banks and certain financial institutions are supervised by the Bangko Sentral ng Pilipinas (BSP).
- Financing companies and lending companies are mainly under the Securities and Exchange Commission (SEC), subject to the Financing Company Act and Lending Company Regulation Act.
- These regulators issue circulars and rules requiring:
  - Fair and transparent pricing
  - Reasonable collection practices
  - Proper disclosure of fees and charges
Data Privacy Act (RA 10173)
- Regulates the handling of personal data in collection activities.
- Excessive or unnecessary disclosure of a borrower’s debt to third parties, or harassment via messages and calls, can violate privacy and may give rise to complaints.

III. What Are “Collection Fees” in Car Loans?

In practice, several types of charges may be lumped together as “collection fees”:

Penalty Interest / Late Payment Charges
- Usually a percentage per month on overdue installments (e.g., 3% per month on any unpaid installment).
- Intended to compensate the lender for the delay.
Collection or “Dunning” Fees
- Flat amount or percentage allegedly to cover the cost of sending collectors, making calls, sending demand letters, etc.
Attorney’s Fees
- Often stipulated as a percentage of the total amount due (e.g., 25%) if the account is referred to legal counsel or suit is filed.
- Can be categorized as:
  - Indemnity for attorney’s fees by contract
  - Or actual attorney’s fees awarded by a court.
Repossession and Storage Fees
- Costs related to pull-out of the vehicle, towing, storage in a yard, appraisals, and auction or sale.
- Some contracts allow the lender to charge these to the borrower and add them to the outstanding loan balance.
Other Administrative Charges
- “Processing charges,” “field visit fees,” “handling fees,” and other labels.

All of these must be examined carefully to determine if they are:

Properly stipulated in the contract
Reasonably related to the lender’s actual costs
Not duplicative or unfairly compounded
Not unconscionably high

IV. When Are Collection Fees Legally Valid?

Under Philippine law, a collection fee (or any similar charge) is generally valid when:

It Is in Writing and Clearly Agreed Upon
- The fee should appear in:
  - The Promissory Note / Loan Agreement
  - The Disclosure Statement
  - The Chattel Mortgage or related documents
- “Surprise” charges not mentioned in any of these documents can be attacked as having no contractual basis.
It Is Not Contrary to Law, Morals, Public Order, or Public Policy
- Even if written, a clause that is extremely oppressive may be void or reducible.
- Example: a clause that allows the lender to demand a huge one-time collection fee plus massive penalty interest, on top of normal interest, can be challenged as contrary to public policy.
It Is Not Iniquitous or Unconscionable
- Courts look at:
  - The relationship between the fee and the principal obligation
  - The borrower’s circumstances and bargaining power
  - The combined effect of interest, penalties, and fees
- The Supreme Court has repeatedly cut down extremely high interest or penalty rates (e.g., multiple percent per month compounded, or massive penalty percentages) for being unconscionable. The same logic applies to collection and attorney’s fees that reach, for example, 20–30% or more of the total obligation.
It Does Not Result in Double or Multiple Penalties
- If a borrower is already paying penalty interest for late payment, layering an extra huge collection fee on top may be seen as double punishment for the same default.
- Courts are inclined to reduce or invalidate overlapping, punitive charges.

V. Abusive Collection Practices vs. Valid Collection Efforts

Valid efforts to collect a debt include:

Reasonable phone calls and written reminders
Formal demand letters
Negotiating restructuring or settlement
Lawful repossession of the car if allowed by the contract and the law

However, abusive practices can give rise to civil and even criminal liability, and may support a borrower’s challenge to fees, especially when:

Collectors threaten arrest, imprisonment, or bodily harm
They use obscene or insulting language
They harass the borrower’s relatives, employer, or neighbors
They publicly shame the borrower (e.g., posting about the debt on social media, tarpaulins, mass texts)
They contact people who have nothing to do with the loan excessively and disclose details of the debt without justification

Abusive collection can violate:

Civil Code provisions on abuse of rights and human dignity
Data Privacy Act, if excessive or unnecessary disclosure of personal data occurs
Possibly criminal laws (grave threats, unjust vexation, coercion, etc.)

While this does not automatically erase the loan, it can be used to:

Support a complaint to regulators
Strengthen a negotiation for waiver or reduction of fees
Claim moral and exemplary damages in court, in appropriate cases

VI. How to Assess if Collection Fees Are Excessive

A borrower disputing high fees should systematically analyze the charges:

Secure All Relevant Documents
- Promissory note / loan agreement
- Chattel mortgage
- Disclosure statement (Truth in Lending)
- Any restructuring or amendment agreements
- Statements of account and demand letters
Break Down the Amount Claimed Separate at least the following items:
- Unpaid principal
- Accrued contractual interest
- Penalty interest (late payment charges)
- Collection fees, “dunning” fees, service charges
- Attorney’s fees (contractual or claimed)
- Repossession, towing, storage, and auction fees
Compare with the Contract
- For each item, find its contractual basis:
  - Is the percentage or amount stated in the contract?
  - Or is it only mentioned in a later letter, email, or verbal statement?
- If a fee does not appear in any signed document, its legality is questionable.
Check Reasonableness Ask:
- How large are the collection/penalty fees relative to the unpaid principal?
- Are the fees piled on top of already high interest and penalties?
- Are there multiple layers of penalty and collection charges for the same default?
- Does the percentage (e.g., 20–30% “collection fee”) look grossly excessive?
Look for Possible Computation Errors
- Misapplication of payments
- Charging penalties on already-penalized amounts
- Continuing to charge penalties even during a grace period or after repossession
- Charging storage fees for longer than the car was actually stored

VII. Legal Grounds to Dispute High Collection Fees

Philippine law recognizes several arguments you can raise against excessive fees:

No Contractual Stipulation / Lack of Disclosure
- If the collection fee or specific percentage does not appear in the loan documents or disclosure statement, you may claim:
  - It was never part of the agreement;
  - It violates the Truth in Lending Act and principles of transparency.
- In many disputes, lenders retreat and waive such “invented” fees.
Unconscionable or Iniquitous Penalties (Civil Code Articles 1229, 2227)
- Even if there is a written clause, you may argue that:
  - The fee is excessive relative to the principal and actual damages
  - The combination of interest, penalty interest, and collection fees is oppressive
- Courts have the power to reduce these amounts to a reasonable level.
Duplication and Overlapping Charges
- If:
  - Normal interest is already high;
  - Penalty interest is imposed; and
  - A large collection fee is added, you can invoke the doctrine against double recovery and multiple penalties.
Violation of Consumer Protection Principles
- Under the Consumer Act, a fee may be attacked as an unconscionable act/practice if it:
  - Takes advantage of serious economic distress;
  - Imposes a grossly excessive price in relation to the value of services.
Violation of Good Faith and Abuse of Rights
- Articles 19–21 of the Civil Code require parties to exercise rights with justice and good faith.
- Using harsh and oppressive fee structures to pressure consumers can be argued as an abuse of rights.

VIII. Practical Remedies and Strategies

A. Negotiation with the Lender

Most disputes start—and often end—with negotiation. Practical steps:

Ask for a Written Breakdown
- Request a detailed statement that shows:
  - How each fee was computed
  - The contractual basis (clause or document) for each item
Invoke Legal Grounds in Plain Language You may point out, in writing:
- A fee is not in the contract or disclosure statement;
- The total charges are too heavy and unfair;
- Courts can legally reduce unconscionable penalties and fees;
- You are willing to pay principal plus reasonable interest and modest fees, but not excessive penalties.
Propose a Realistic Settlement
- Offer to:
  - Pay a lump sum where all or part of the fees are waived, or
  - Enter into a restructured payment plan with reduced penalties.
Formalize Any Agreement
- Ensure any waiver or reduction is put into a written agreement or revised computation signed by the lender.

B. Internal Complaint Mechanisms

For Banks and BSP-Supervised Institutions
- File a complaint with the bank’s Customer Assistance / Consumer Protection office.
- They are required by BSP rules to maintain such channels and to respond within certain periods.
For Financing and Lending Companies
- Use the company’s formal complaint procedure (special email, hotlines, etc.).
- Note all correspondence in writing, including dates of calls and persons spoken to.

A formal internal complaint, even if not immediately successful, creates a paper trail that is useful for regulators or courts later.

C. Complaints to Regulators

Bangko Sentral ng Pilipinas (BSP)
- If the lender is a bank or BSP-regulated financial institution, you may file a complaint about:
  - Unreasonable or undisclosed fees
  - Unfair debt collection practices
- BSP can conduct investigations and issue directives or impose sanctions on supervised entities.
Securities and Exchange Commission (SEC)
- For financing and lending companies, you may complain to the SEC, which regulates their operations and may discipline entities that:
  - Charge abusive fees
  - Engage in harassment and unfair practices
Department of Trade and Industry (DTI)
- You can invoke consumer protection provisions for unconscionable practices.
National Privacy Commission (NPC)
- For privacy-related complaints, such as:
  - Public posting of your debt
  - Excessive disclosure to third parties
  - Harassment using your personal information

Filing with regulators does not instantly erase debts, but it can pressure lenders to reconsider excessive charges and improve your negotiation position.

IX. Court Actions and Defenses

A. When the Lender Sues for Collection or Deficiency

If the lender sues for payment (including fees) or for a deficiency after repossession and sale of the car:

You can raise as defenses:
- Lack of contractual basis for particular fees
- Unconscionability of penalties and collection fees
- Errors in computation or lack of disclosure
- Abusive collection practices (for purposes of counterclaims)
You can ask the court to:
- Reduce or delete excessive penalties and collection fees
- Limit recovery to principal plus reasonable interest
- Award moral and exemplary damages, and your own attorney’s fees, when justified

Courts regularly scrutinize the fairness of interest and penalty provisions, especially in consumer loans.

B. When the Borrower Sues

In some situations, the borrower (or former borrower) may file:

Civil actions for:
- Annulment or reformation of unconscionable provisions
- Damages for abusive collection and improper fees
- Accounting of repossession and sale proceeds
The borrower may argue:
- The car was sold at an undervalued price, inflating the alleged deficiency
- The lender included improper or inflated fees (e.g., storage fees, collection charges) in the deficiency computation

Courts can order a recomputation and declare certain charges unenforceable.

X. Special Issues

Guarantors and Co-Makers
- They may be held solidarily liable for the debt, including fees, if the contract so states.
- However, they also benefit from defenses against unconscionable penalties and invalid fees.
Assignment to Collection Agencies
- If the lender sells or assigns the account to a collection agency:
  - The obligation does not increase just because of the assignment.
  - Any new or higher “collection fee” demanded by the agency needs a valid contractual basis and is still subject to scrutiny for unconscionability.
Restructured or “Condoned” Accounts
- In restructuring:
  - Be careful of clauses which “capitalize” old penalties and fees into the new principal.
  - Signing a restructuring agreement can ratify some charges, but courts may still reduce unconscionable amounts.

XI. Preventive Measures When Taking a Car Loan

To avoid future disputes over collection fees:

Read the Fine Print
- Identify:
  - Interest rate (per annum)
  - Penalty interest (per month on overdue installments)
  - Collection/attorney’s fees percentage
  - Repossession and storage fees
Ask Questions
- “If I delay by one month, how exactly will penalties be computed?”
- “If the car is repossessed, what fees can you legally charge?”
Compare Across Lenders
- Some banks may offer lower penalty rates or no separate collection fee.
Keep Copies of Everything
- Contracts, disclosure statements, payment receipts, and communications.
Monitor Your Account
- Regularly request or download statements of account, especially if you miss a payment.

XII. Sample Outline of a Dispute Letter

Below is a generic structure (not a fixed template) you can adapt:

Subject: Request for Review and Waiver/Reduction of Collection and Penalty Fees – Car Loan No. ______

Dear [Lender’s Name/Department],

I am the borrower under Car Loan No. ______ for the vehicle [make/model/plate]. I acknowledge that there have been delays in my payments and I am willing to settle my legitimate obligations.

However, based on your latest statement of account dated ____, the total amount claimed includes the following items: [list of collection fees, penalty charges, attorney’s fees, etc.]. After reviewing my Promissory Note/Loan Agreement and Disclosure Statement, I have the following concerns:

Some of these fees do not appear to be clearly stipulated in our written contracts and may not have been properly disclosed as required by law.

The combined penalties and collection fees appear excessive relative to the unpaid principal and may be considered unconscionable. Under the Civil Code, iniquitous or unconscionable penalties and liquidated damages may be reduced.

In view of this, I respectfully request:

A detailed breakdown of my account, indicating the contractual basis for each fee or charge; and

A waiver or substantial reduction of collection and penalty fees, so that I can focus on paying the principal and reasonable interest.

I remain willing to work out a fair and realistic payment arrangement with your office. I hope we can resolve this matter amicably.

Sincerely, [Name] [Contact details]

XIII. Key Takeaways

Collection fees and related charges in delayed car loans must have a clear contractual basis and be disclosed to the borrower.
Even when stipulated in writing, excessive or unconscionable penalties and fees may be reduced by the courts.
Borrowers can dispute high fees through:
- Documentation and careful review
- Written negotiation with the lender
- Complaints to BSP, SEC, DTI, NPC and other regulators
- Court actions or defenses when sued
Abusive collection practices—harassment, public shaming, privacy violations—can themselves be a ground for regulatory action and claims for damages, and can support efforts to have fees waived or reduced.

For anyone facing a delayed car loan with massive add-on charges, the central theme of Philippine law is this: a debtor must pay, but only what is lawful, reasonable, and properly agreed upon—not whatever amount a creditor chooses to demand.