A Comprehensive Legal Overview

I. Overview

Overcharging on loan repayments is a common source of disputes in the Philippines, especially with the rise of digital lending apps, credit cards, microfinance, and informal lending. “Overcharge” here can mean:

Being made to pay more than what was agreed in the written contract;
Being imposed hidden or unauthorized fees;
Miscalculation or misapplication of payments resulting in an inflated outstanding balance; or
Continued imposition of interest and penalties in a way that is unfair or contrary to law or jurisprudence.

This article explains the legal framework, typical forms of overcharging, and the practical and legal remedies available to borrowers in the Philippine setting.

II. Legal Framework

1. Freedom to Contract vs. Protection of Borrowers

Philippine law generally respects freedom of contract (Civil Code Art. 1306): parties may establish stipulations they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

However, this freedom is not absolute. In loan disputes, the following principles are crucial:

Interest must be expressly stipulated in writing (Civil Code Art. 1956). If not in writing, the lender cannot charge interest at all.
Stipulations that are unconscionable, iniquitous, or contrary to public policy may be annulled or modified by the courts (Civil Code Arts. 1229, 1306, 1409).
Consumer protection and specific sectoral laws (banking, lending companies, financing companies, microfinance, etc.) impose additional obligations on lenders.

2. The “Usury Law” and Interest Rate Limits

The old Usury Law (Act No. 2655) originally set ceilings on interest rates. However:

Monetary Board Circular No. 905 (1982) effectively lifted interest ceilings, giving parties freedom to stipulate interest rates.

But courts have consistently held that even if ceilings are lifted, interest rates may still be reduced if they are:

“Unconscionable” or “excessive”;
A form of unjust enrichment; or
Contrary to morals and public policy.

Philippine jurisprudence has repeatedly struck down interest rates such as 5% per month, 6% per month, or even greater, declaring them unconscionable and reducing them to a reasonable level (often 12% or 6% per annum, depending on the period and nature of the obligation).

In practice, this is often where disputes on overcharges in interest and penalties arise.

3. Truth in Lending Laws

The Truth in Lending Act (Republic Act No. 3765) requires lenders to fully disclose the true cost of credit, including:

The annual percentage rate (APR);
Service charges or finance charges;
Any other fees that affect the total amount the borrower must pay.

Failure to properly disclose may:

Expose the lender to administrative and/or penal sanctions; and
Be used as a basis to challenge undisclosed or misleading charges.

Banks and other financial institutions are also subject to Bangko Sentral ng Pilipinas (BSP) rules on transparency and disclosure of loan terms, especially in consumer loans.

4. Financial Consumer Protection Law

The Financial Products and Services Consumer Protection Act (RA 11765) strengthens protections for users of financial services (banks, e-money issuers, credit providers, etc.). Key points:

Providers must treat financial consumers fairly and reasonably.
Misleading, deceptive, or abusive conduct can be a ground for administrative sanctions.
Financial consumers have the right to file complaints with the appropriate financial regulator (BSP, SEC, Insurance Commission, etc.).

This law is directly relevant when disputing overcharges in loans issued by regulated financial institutions.

5. Sector-Specific Regulations

Depending on the lender’s nature, different regulators and laws apply:

Banks, thrift banks, rural banks, quasi-banks, and certain credit-granting institutions – supervised by the BSP.
Lending companies and financing companies – governed by:
- Lending Company Regulation Act (RA 9474);
- Financing Company Act and SEC rules;
- SEC memoranda on online lending and abusive collection practices.
Microfinance NGOs – subject to specific laws and regulations.
Insurance-related loans or credit life insurance – under Insurance Commission oversight.
Cooperatives – regulated by the Cooperative Development Authority (CDA).

Knowing who the regulator is helps determine where and how to escalate complaints about overcharges.

III. Common Forms of Overcharging in Loan Repayments

1. Interest Beyond the Agreed Rate

Charging higher interest than what is written and signed in the loan contract, promissory note, or disclosure statement.
Using different interest bases (e.g., quoting rate as “flat” but computing on a “diminishing” or vice versa) without clear disclosure.

2. Undisclosed or Misrepresented Fees

Examples:

Processing fees, service fees, documentation fees, “system maintenance” or “app usage” fees not clearly disclosed;
Mandatory add-on products (insurance, membership, etc.) that inflate the total loan cost;
Collection charges not provided in the contract.

Under transparency rules and RA 3765, such charges must be clearly disclosed and explained.

3. Excessive Penalties and Default Charges

These include:

Very high penalty rates (e.g., 5% per month on top of regular interest);
Multiple “layers” of charges for the same event of default (late payment fee, penalty interest, collection charge, etc.) that cumulatively become oppressive.

Courts may treat such stipulations as void or reducible if they are grossly one-sided.

4. Misallocation or Misapplication of Payments

Typical patterns:

Payments applied first to penalties and charges, then to interest, and only last to principal, causing the balance to barely decrease despite consistent payment;
Incorrect posting of payments (e.g., delayed posting causing artificial “late” status and penalties);
Failure to reflect lump-sum or prepayments.

Unless the contract clearly and lawfully provides otherwise, Civil Code rules on application of payments and legal compensation may be invoked.

5. Unauthorized Repricing or Unilateral Changes

In variable-rate loans, the lender may reserve the right to reprice interest. However:

Repricing must follow the contractual terms and any applicable regulations;
Arbitrary or unilateral increases without basis or notice can be challenged.

6. Continuous Interest After Full Payment or Illegal Collection

Continuing to charge interest even after the loan has been fully settled due to accounting errors or refusal to issue a release of mortgage/chattel;
Attempting to collect beyond the amount adjudged or settled.

Borrowers may seek legal remedies for refunds and damages in such cases.

IV. Rights of the Borrower

A borrower disputing overcharges typically relies on the following rights and legal concepts:

Right to Full Disclosure
- To know the real interest rate, fees, and payment schedule;
- To receive copies of the loan contract, amortization schedule, and disclosure statement.
Right to Accurate and Timely Statements
- Regular statements of account, updated balances, and breakdown of how payments are applied.
Right to Challenge Unconscionable Terms
- Courts may void or reduce interest, penalties, and fees that are excessive or contrary to public policy.
Right to Protection from Abusive Practices
- Harassment, threats, shaming, and other abusive collection methods may give rise to liability under various laws (e.g., anti-cyberbullying, data privacy, and sectoral regulations).
Right to Seek Administrative, Civil, and Even Criminal Remedies
- Complaints to regulators;
- Civil actions for annulment of stipulations, reformation of instrument, sum of money, or damages;
- Criminal cases for fraud or violation of specific statutes, where applicable.

V. Practical Steps to Dispute Overcharges

1. Gather and Organize Documentation

At minimum, a borrower should compile:

The loan contract / promissory note;
Disclosure statement and amortization schedule;
Receipts, payment confirmations, bank deposit slips, screenshots (for app payments), and transaction history;
Statements of account (SOA), billing statements, or system-generated summaries;
Any text messages, emails, or chat logs with the lender or its agents.

Records are crucial; courts and regulators give weight to written evidence over mere allegations.

2. Reconstruct and Recompute the Loan

Even without an accountant:

List all due dates, amounts due, and payments actually made;
Check whether:
- Interest charged matches the agreed rate and method (flat vs. diminishing, simple vs. compounded);
- Penalties are within the contractual limits;
- Fees collected are those disclosed.

If the loan is complex (e.g., variable-rate housing loan, business line of credit), borrowers often engage an accountant or legal counsel to prepare a detailed recomputation and comparison table.

3. Raise the Issue with the Lender (Internal Complaint)

Before going to regulators or courts, it is generally advisable to:

Write a formal letter or email to the lender:
- Identify specific overcharges (e.g., “Late payment fee of ₱X despite on-time payment,” “Interest rate increased from X% to Y% without notice”);
- Attach supporting documents and a simple recomputation;
- Demand correction of the account, refund (if overpayment), and updated statement.
Ask for:
- A written explanation of how the account was computed;
- A revised statement, if they admit error.

Keep proof of sending (registered mail, email logs, screenshots).

4. Escalate to the Appropriate Regulator

If the lender refuses to correct or ignores the complaint, the borrower may escalate:

Banks / BSP-supervised entities – file a written complaint with the BSP’s financial consumer assistance / complaints unit.
Lending companies / financing companies / online lenders – complain before the SEC (especially for illegal or abusive online collection and undisclosed charges).
Cooperatives – escalate to the CDA.
Insurance-related overcharges – file with the Insurance Commission, if the overcharge involves insurance premiums or related products.

Regulators can:

Require the lender to respond;
Conduct investigations and audits;
Impose administrative fines, suspensions, or other sanctions.

While regulators do not always recompute individual accounts like a court, their findings and directives can strongly influence the outcome of any dispute.

5. Consider Barangay Conciliation (for Certain Parties)

If the dispute is between natural persons (e.g., private individual lender vs. individual borrower) who reside in the same city or municipality, the controversy may first need to undergo barangay conciliation under the Katarungang Pambarangay system before filing a court case (subject to exceptions).

However, disputes involving corporations, banks, or certain institutions generally do not go through barangay conciliation and can be filed directly in court.

6. Judicial Remedies

If administrative remedies are inadequate or if the lender still insists on overcharges, borrowers may resort to court action, such as:

Action for Sum of Money and/or Refund
- To recover overpaid amounts;
- To compel correction of the outstanding balance.
Action to Annul or Reform Loan Stipulations
- To declare certain interest, penalty, or fee clauses void for being unconscionable or contrary to law;
- To have the written contract reformed to reflect the true agreement.
Small Claims Proceedings
- For relatively smaller amounts (subject to monetary ceiling as provided by rules, which has been periodically adjusted);
- Faster and no need for formal representation by counsel in some cases.
Injunction or Consignation
- To prevent foreclosure or seizure based on inflated claims, the borrower may:
  - File a case to enjoin foreclosure;
  - Consign (deposit) the amount genuinely believed to be due, while contesting the overcharged portion.

In all these actions, courts can:

Void or reduce excessive interest and penalties;
Order recomputation of the loan;
Award refunds, moral and exemplary damages, and attorney’s fees where warranted.

VI. Key Doctrines from Jurisprudence (General Principles)

While individual cases differ, Philippine Supreme Court decisions on loans and interest share common themes:

Unconscionable Interest is Void Courts may strike down interest rates that are shockingly high or oppressive, even if agreed upon, and substitute a reasonable interest rate.
Penalty Clauses May Be Reduced Even when valid, penalty clauses may be equitably reduced if they are iniquitous or the debtor has substantially performed.
No Interest Without Written Stipulation In absence of a written interest agreement, the lender can recover only the principal and, in some situations, legal interest from the time of judicial demand.
Double Recovery is Prohibited A creditor cannot recover both interest and penalties in a way that amounts to unjust enrichment or punishment beyond what is just.

These doctrines support borrowers who face overcharges disguised as “agreed” interest or penalties.

VII. Common Issues in Modern Lending Contexts

1. Online Lending Apps and Harassment

Many borrowers experience:

Abrupt ballooning of obligations due to short-term high interest and multiple fees;
Public shaming, threats, and harassment of contacts.

Aside from overcharge disputes, these may involve violations of:

Data privacy laws;
Anti-harassment rules; and
Specific SEC/BSP/IC regulations on collection practices.

2. Mortgage and Foreclosure Overcharges

Housing and real estate loans sometimes involve:

Disputed interest repricing;
Capitalized interest (adding unpaid interest to principal);
Foreclosure based on allegedly inflated amounts.

Borrowers can:

Request detailed breakdowns of the total claim;
Challenge computations administratively or in court;
Assert the doctrines on unconscionable interest and penalty reduction.

3. Credit Card and Revolving Credit

Overcharges here often involve:

Multiple charges for the same late event (late fee + penalty interest + overlimit fee etc.);
Misallocation of payments (e.g., prioritized to low-rate balance instead of high-rate balance, contrary to regulation or contract);
Interest charged on disputed amounts.

These disputes similarly invoke transparency rules, consumer protection laws, and jurisprudence on unfair and excessive charges.

VIII. Practical Tips for Borrowers

Always Ask for the Documents Upfront
- Get copies of all contracts and disclosure statements before signing.
- Don’t rely solely on verbal explanations or app screens.
Clarify the Interest Rate and Computation Method
- Is the rate flat or on diminishing balance?
- Are there add-on fees or mandatory insurance?
Keep All Receipts and Proof of Payment
- Treat them as evidence; they may be your best defense against inflated claims.
Act Quickly When You Notice Discrepancies
- The longer you wait, the more difficult it may become to correct errors and stop compounding overcharges.
Put Everything in Writing
- Verbal demands are easy to deny; written complaints and replies build a clear record.
Seek Professional Advice for Complex Cases
- For large loans or serious disputes (e.g., risk of losing a home or business), consulting a lawyer or qualified professional is highly advisable for tailored advice and representation.

IX. Conclusion

Disputes over overcharges in loan repayments in the Philippines sit at the intersection of freedom of contract, consumer protection, and equitable relief. While lenders and borrowers are free to agree on terms, the law—and the courts—will not enforce stipulations that are unconscionable, abusive, or contrary to public policy.

Borrowers are not helpless. With proper documentation, methodical recomputation, and use of the available administrative and judicial remedies, they can:

Challenge unjust interest, penalties, and fees;
Seek correction of their account;
Recover overpayments; and
Hold abusive lenders accountable.

Anyone facing a serious dispute involving large sums or risk of foreclosure should consider obtaining personal legal advice from a Philippine lawyer, who can examine the exact contracts, statements, and facts and craft a strategy suited to the specific case.