Overview

In the Philippines, statutory usury ceilings were effectively lifted in 1982, so parties may generally agree on any interest rate. But that freedom isn’t absolute. Courts and regulators routinely strike down “iniquitous, unconscionable, and exorbitant” interest as contrary to law, morals, good customs, public policy, or public order. This article explains the legal basis, leading cases, and practical, step-by-step strategies for disputing unfair interest on old debts—including loans, credit lines, cards, and retail financing—plus templates and computation tips you can use right away.

Short version: Interest must be (1) expressly written, (2) fair, and (3) computed correctly. If it’s not, you can negotiate a reduction or ask a court/regulator to void or pare it down, re-compute, and limit penalties.

Legal Foundations

1) Freedom to Stipulate vs. Limits

Freedom to contract allows parties to agree on interest (Civil Code Art. 1306).
But courts may annul or reduce terms that are unconscionable or contrary to morals or public policy (Arts. 19, 20, 21, 22, 1159, 1409, 1423, 2227, 1229).

2) Interest Must Be in Writing

Civil Code Art. 1956: No interest shall be due unless expressly stipulated in writing. No signed writing = no conventional interest. (You may still be liable for legal interest from default/judgment—see below.)

3) Legal Interest vs. Conventional Interest

Conventional interest: the rate you and the lender agreed on in writing.
Legal interest: the statutory/jurisprudential rate the courts apply:
- Historically, the Supreme Court set guideposts in Eastern Shipping Lines v. CA and later harmonized in Nacar v. Gallery Frames (2013), which clarified when 6% per annum applies (e.g., from the time of judicial or extrajudicial demand or finality of judgment, depending on the nature of the obligation).
- Key takeaway for disputes: if the contractual rate is void or reduced, courts often substitute legal interest for fairness and uniformity from appropriate reckoning points.

4) Penalty Interest, Late Charges, and Attorney’s Fees

Penalty clauses can be equitably reduced if they are iniquitous or unconscionable (Art. 1229).
Liquidated damages/late fees are also subject to equitable reduction (Art. 2227).
Attorney’s fees stipulated in loan documents may be cut down if excessive or if the debtor did not act in bad faith.

5) Compound Interest & Capitalization

Compounding (interest on interest) is not presumed. It requires a clear written stipulation.
Even with a stipulation, Philippine courts scrutinize capitalization that results in excessive or predatory totals. Interest already due can earn legal interest once judicially demanded, but automatic, frequent compounding without transparent consent is vulnerable to challenge.

6) Disclosure Duties

The Truth in Lending Act (R.A. 3765) requires clear disclosure of true cost of borrowing (finance charges, effective rates). Non-disclosure or deception strengthens an unconscionability challenge.
The Consumer Act (R.A. 7394) and sectoral regulations (banks, lending companies, financing companies, micro-finance, credit cards) prohibit unfair or deceptive acts or practices.

Note: While general usury ceilings were suspended, some sectors (e.g., credit cards) have regulatory caps and rules that can change over time. If applicable, bring those to the fore as an independent ground to reduce or void charges.

Landmark Supreme Court Themes (Plain-English)

Medel v. CA (1998): A 5% monthly (≈60% per annum) interest struck down as unconscionable; the Court reduced the rate to a reasonable level.
Subsequent cases have repeatedly invalidated or pared down rates in the 36%–72% per annum range (and beyond) as iniquitous, then substituted legal interest (or a reasonable conventional rate) and recomputed the debt.
Nacar v. Gallery Frames (2013): Clarified 6% per annum as the general legal interest baseline and reckoning points for pre-judgment and post-judgment interest.
Courts also reduce penalties/late charges/attorney’s fees that collectively make an obligation oppressive.

Practical use: Cite these lines of authority to argue your rate is (1) not validly agreed upon in writing, (2) deceptive/non-disclosed, or (3) excessive by Supreme Court standards and thus must be reduced.

When Is an Interest Rate “Unconscionable”?

There’s no single numeric cut-off because context matters (borrower sophistication, disclosure, bargaining power, market norms, collateral, risk, duration). Courts look at:

Magnitude: High nominal rates (especially monthly rates that balloon annually).
Stacking: Base interest plus penalty interest plus late fees plus attorney’s fees.
Compounding: Frequent capitalization without clear consent.
Disclosure: Missing or confusing statements of APR/effective rates.
Collection conduct: Harassing, deceptive, or bad-faith practices.
Equity: Whether enforcement would shock the conscience.

If the total finance charge looks punitive or disguised, courts typically blue-pencil it down.

Strategy: How to Dispute Interest on Old Debts

Step 1 — Gather and Audit Your Paper Trail

Debt instrument: promissory note, loan agreement, card terms, chattel mortgage, disclosure statements.
All amendments: renewals, restructurings, repayment plans, waivers.
Account history: statements of account, payment receipts, letters, e-mails/SMS/app notifications.
Demand letters: from creditor or collectors (dates matter for legal interest reckoning).
Assignment notices: if a debt buyer is involved, look for notice of assignment (Civil Code on assignment requires notice for enforceability against the debtor).

Step 2 — Run a Proper Re-Computation

Strip out any interest not validly in writing.
Remove or reduce unconscionable interest/penalties/fees; substitute legal interest (often 6% p.a.) from proper reckoning points per jurisprudence.
Stop unauthorized compounding unless expressly stipulated.
Credit every payment correctly: principal first (unless your contract clearly provides otherwise), then interest.
Check for prescription:
- Written contracts generally: 10 years from default/breach.
- Judgments: 10 years from finality.
- If the principal obligation has prescribed, accessories (interest/penalties) generally follow and cannot survive on their own.
- Watch for interruptions (acknowledgment, part-payment, written promises).

Tip: Put your re-computation on a spreadsheet with a clear timeline and simple interest basis unless a valid compounding clause exists.

Step 3 — Send a Targeted Dispute & Validation Letter

Dispute the amount as inflated by unconscionable interest and improper charges.
Demand validation: original signed contract, full transactional history, disclosure documents, assignment papers, and computation worksheet.
Offer a good-faith tender of the uncontested amount (your recomputed figure) to show equity and stop additional charges.

Mini-template (snippets you can adapt):

“Pursuant to Art. 1956, no interest is due absent a written stipulation. Kindly provide the signed instrument expressly stating the rate and any compounding agreement.”
“Even assuming a written stipulation, the imposed __% per month with __% penalty and attorney’s fees is iniquitous and unconscionable under Supreme Court jurisprudence (e.g., Medel v. CA; Nacar v. Gallery Frames). We therefore dispute these charges and recompute the balance at legal interest only.”
“Please supply a detailed transaction and computation history. Pending validation, we tender ₱___ as the undisputed principal plus lawful interest.”

Step 4 — Escalate to the Right Forum (if needed)

Banks/credit card issuers: File with the bank’s complaints unit; escalate to the Bangko Sentral ng Pilipinas’ consumer assistance channel if unresolved.
Lending/financing companies & app-based lenders: Complain to the company; escalate to the Securities and Exchange Commission for unfair charges or collection practices.
Cooperatives: Elevate to the Cooperative Development Authority.
Insurance-related credit (e.g., premium financing): Insurance Commission.
Courts: If sued for collection, raise your defenses; or you can affirmatively file a civil action for annulment/reformation of the interest stipulation, accounting and recomputation, consignation, or injunction against unfair collection.

Litigation route: Ask the court to (1) void/reduce the rate and penalties; (2) substitute legal interest; (3) recompute; (4) deny attorney’s fees or reduce them; and (5) award damages for abusive practices, when warranted.

Step 5 — Settlement Playbook

Use your re-computation as your anchor.
Emphasize case risk to the creditor (courts may cut their add-ons and even deny fees).
Offer lump-sum or short payment plans tied to the recomputed lawful balance.
Document full settlement with clear release language.

Defenses & Arguments Checklist (Quick Use)

No signed writing stating interest (Art. 1956).
Rate is unconscionable; ask court to reduce or void and apply legal interest (Medel line of cases; Art. 1229, 2227).
Stacked penalties (penalty interest + late fee + attorney’s fees) are excessive; seek equitable reduction.
Unauthorized compounding; compounding clause is absent/ambiguous.
TILA/Disclosure defects; rate or charges not clearly disclosed.
Wrong reckoning points for interest (pre-demand vs. post-demand; judgment).
Misapplied payments; require proper allocation.
Prescription/laches; long inaction by creditor.
No notice of assignment; debt buyer lacks standing or must first prove title and chain of assignment.
Unfair collection practices; seek damages and regulatory relief.

Computation Guide (Plain Method)

Identify the principal (net disbursed amount after legit fees).
Determine the valid contractual interest (if any) and its period.
If rate is void/reduced → apply legal interest (6% p.a. is commonly used in courts post-Nacar) from the correct date:
- Loans/forbearance: often from demand or default, or as the court directs.
- Judgments: from finality of judgment until full payment.
Penalties/late fees: reduce or remove if excessive; never stack to punitive levels.
No compounding unless clearly stipulated.
Allocate payments: unless contract says otherwise, allocate to interest then principal (or follow the governing clause if it’s fair and valid).
Produce an audit table with dates, running balances, and clear formulas.

Evidence You’ll Want Ready

Signed loan documents and disclosure statements
Account statements and receipts
Demand letters (both sides) and settlement offers
Assignment notices and collector authority
Call/SMS/app logs showing abusive practices (if any)
Your re-computation worksheet (clean and legible)

Sample Prayer (Court Filing Excerpt)

“Wherefore, premises considered, defendant respectfully prays that the Court: (a) declare void the stipulated interest rate and penalties for being unconscionable; (b) reduce such charges to legal interest consistent with Medel and Nacar; (c) order a full accounting and recomputation of the obligation; (d) disallow or reduce attorney’s fees as inequitable; and (e) grant such other reliefs as are just and equitable.”

Special Issues with “Old Debts”

Prescription is often decisive. If the debt is very old and the creditor has been inactive, you may have a limitations defense.
Acknowledge with care: A written acknowledgment or small partial payment can interrupt prescription; get advice before signing “acknowledgment” letters or “promissory” restructurings.
Debt buyers: Demand proof of assignment and chain of title; until proper notice, payments to the original creditor may still be valid.

Common Pitfalls

Paying without written settlement terms (no clear release).
Accepting ballooned collector spreadsheets at face value.
Overlooking penalty stacking and hidden compounding.
Ignoring prescription and reckoning points for interest.
Failing to tender the uncontested amount, which can make you look unreasonable.

FAQs

Q: The contract says 4% per month interest. Is that automatically valid? A: No. Monthly rates that translate to very high annual rates can be struck down as unconscionable even if written. Courts may reduce them and recompute.

Q: There’s no signed contract—only text messages. Can they still charge interest? A: Conventional interest requires a written stipulation (Art. 1956). Absent that, creditors typically get legal interest from proper reckoning points, not a high private rate.

Q: They keep capitalizing interest every month. A: Compounding needs a clear written basis and must still be fair. Courts disfavor abusive capitalization that explodes balances.

Q: Can I complain to regulators instead of going to court? A: Yes. BSP, SEC, CDA, and the Insurance Commission all have consumer helpdesks. Regulatory findings can help settlement or support a court defense.

Q: If the court voids the rate, do I get off scot-free? A: Usually not; courts re-price at legal interest and order a recomputation. But that often slashes the claimed balance.

Final Takeaways

Paper rules: Interest must be written; penalties/fees must be reasonable and disclosed.
Courts can cut excessive rates and substitute legal interest; penalties and attorney’s fees can be reduced.
For old debts, prescription and lack of assignment proof are powerful defenses.
Document, recompute, and negotiate with a clear legal theory and clean numbers.
If sued or stonewalled, seek judicial relief for voiding/reduction and accounting.

This article provides general legal information for the Philippine setting. For specific cases and fast-changing sectoral caps or agency procedures, consider consulting a Philippine lawyer with your documents and a draft re-computation in hand.