Introduction

In the Philippines, lending practices, particularly those involving high interest rates, are governed by a combination of civil law provisions, regulatory issuances from the Bangko Sentral ng Pilipinas (BSP), and jurisprudence from the Supreme Court. The question of whether a 15% interest rate charged every 15 days is legal touches on the concepts of usury, freedom of contract, and unconscionable stipulations. This rate, when annualized, equates to an extraordinarily high percentage, raising concerns about exploitation and fairness in financial transactions.

This article explores the legality of such interest rates under Philippine law, the historical and current framework on usury, methods for calculating effective interest, potential remedies for borrowers, and the role of small claims courts in resolving disputes. It draws from key legal principles, statutes, and case law to provide a comprehensive overview, emphasizing protections for consumers and the boundaries of contractual freedom.

Historical Context of Usury Laws in the Philippines

Usury, defined as the charging of excessive or illegal interest on loans, has long been regulated in the Philippines. The Usury Law (Act No. 2655), enacted in 1916, originally set ceilings on interest rates: 12% per annum for secured loans and 14% per annum for unsecured loans. Violations could result in penalties, including the nullification of interest stipulations.

However, in 1982, the Central Bank (now BSP) issued Circular No. 905, which effectively suspended the interest rate ceilings under the Usury Law. This deregulation was intended to promote a market-driven economy, allowing lenders and borrowers to negotiate interest rates freely. The rationale was to encourage lending and investment by reflecting actual market conditions, inflation, and risk.

Despite this suspension, usury has not been entirely eradicated from Philippine legal discourse. Courts continue to intervene in cases where interest rates are deemed "iniquitous, unconscionable, and exorbitant," as these violate public policy under Article 1306 of the Civil Code, which prohibits contracts contrary to law, morals, good customs, public order, or public policy. The Supreme Court has repeatedly affirmed that while there is no fixed ceiling, rates must not be shocking to the conscience.

Current Legal Framework on Interest Rates

Stipulated vs. Legal Interest

Under Article 1956 of the Civil Code, no interest shall be due unless expressly stipulated in writing. If stipulated, the rate is binding on the parties, subject to the unconscionability doctrine.

In the absence of stipulation:

Article 2209 provides for legal interest on obligations consisting of loans or forbearance of money, currently set at 6% per annum by BSP Monetary Board Resolution No. 796 (effective July 1, 2013, via Circular No. 799). This was reduced from the previous 12% to align with lower inflation rates.
For judgments, interest accrues from the date of finality until full payment, also at 6% per annum.

For monetary judgments involving loans, the stipulated interest applies until full payment, but if unconscionable, it may be reduced.

Unconscionable Interest Rates: Judicial Standards

The Supreme Court has established guidelines for determining unconscionability in cases like Medel v. Court of Appeals (G.R. No. 131622, 1997) and Chua v. Timan (G.R. No. 170452, 2007). Key principles include:

Interest rates exceeding 3% per month (36% per annum) are often presumed unconscionable, especially in consumer loans.
Factors considered: borrower's bargaining power, loan purpose, duration, collateral, and prevailing market rates.
In Advincula v. Advincula (G.R. No. 190864, 2014), a 10% monthly rate (120% annually) was voided as exorbitant.
Rates as low as 2.5% monthly have been upheld in commercial contexts with equal parties, but higher rates in personal loans are scrutinized.

The Truth in Lending Act (Republic Act No. 3765) requires full disclosure of finance charges, including interest, to prevent hidden usurious practices. Violations can lead to penalties and allow borrowers to recover excess payments.

Analyzing 15% Interest per 15 Days

Calculation of Effective Interest Rate

A 15% interest rate per 15 days must be annualized to assess its legality. Assuming simple interest for illustration:

Per 15 days: 15%
Per month (approximately 30 days): 30%
Per year (365 days): (15% × (365 / 15)) ≈ 365%

If compounded, the effective annual rate (EAR) could be even higher. Using the formula for EAR:

[ EAR = (1 + \frac{r}{n})^n - 1 ]

Where ( r ) is the nominal rate (15% or 0.15 per period), and ( n ) is the number of periods per year (365 / 15 ≈ 24.33).

This yields an EAR exceeding 3000%, far beyond any reasonable market rate.

In practice, such rates are common in informal lending ("5-6" schemes, where PHP 5 lent returns PHP 6, or 20% per period), but courts consistently strike them down. In People v. Dizon (G.R. No. 128889, 1999), similar high rates were deemed usurious despite deregulation.

Legality Assessment

A 15% per 15 days rate is almost certainly illegal under Philippine law for the following reasons:

Unconscionability: It shocks the conscience, exploiting borrowers in distress. Supreme Court rulings in Sps. Imperial v. Jaucian (G.R. No. 149004, 2005) and others equate such rates to usury.
Public Policy: Article 1409 of the Civil Code declares contracts with illegal causes void. High rates may indicate estafa or violation of anti-usury provisions in the Revised Penal Code (Articles 315 and 195, though rarely enforced post-deregulation).
Consumer Protection: The Consumer Act (RA 7394) and Financial Consumer Protection Act (RA 11765, 2022) empower the BSP and Department of Trade and Industry to regulate predatory lending. Informal lenders charging such rates risk administrative sanctions.
Exceptions: In rare cases, like high-risk venture financing between sophisticated parties, high rates might be upheld, but not in standard consumer loans.

Borrowers can argue the stipulation is void, paying only the principal plus legal interest (6% per annum).

Remedies for Borrowers: Small Claims Court

Overview of Small Claims Procedure

Small claims courts in the Philippines, governed by the Revised Rules on Small Claims Cases (A.M. No. 08-8-7-SC, as amended), provide an expedited, inexpensive forum for money claims up to PHP 1,000,000 (increased from PHP 400,000 by A.M. No. 08-8-7-SC, effective 2022). This covers loans, including disputes over excessive interest.

Key features:

No lawyers required; parties represent themselves.
Filed with the Metropolitan Trial Court, Municipal Trial Court, or Municipal Circuit Trial Court with jurisdiction over the residence of either party.
Process: Filing of Statement of Claim, response within 10 days, hearing within 30 days, decision on the same day or within 24 hours.
No formal evidence rules; affidavits and documents suffice.
Appealable only on questions of law to the Regional Trial Court.

Application to Usury Disputes

Borrowers alleging usurious interest can file for:

Recovery of excess payments (under Article 1413, Civil Code).
Declaration of nullity of interest stipulation.
Damages for moral or exemplary harm if bad faith is proven.

In Santos v. Alcazar (G.R. No. 183034, 2010), the Court allowed small claims recovery in loan disputes. For amounts exceeding PHP 1,000,000, regular civil actions apply, potentially with annulment of contract under Article 1390.

Defenses for lenders: Proof of voluntary agreement and reasonable rate, but courts favor borrowers in unequal bargains.

Steps for Filing a Small Claims Case

Gather Evidence: Loan agreement, payment receipts, computation of interest paid.
Compute Claim: Principal repaid minus excess interest, plus legal interest on overpayments.
File Statement of Claim: Use the standard form, pay minimal fees (PHP 1,000–5,000 depending on amount).
Serve and Respond: Court handles service; defendant responds or faces default.
Hearing and Decision: Judge mediates; if unresolved, decides based on equity.
Execution: Enforceable immediately if no appeal.

If the lender is a bank or formal institution, complaints can also go to the BSP's Consumer Assistance Mechanism.

Special Considerations: Informal Lending and Enforcement Challenges

Informal lenders ("loan sharks") often impose rates like 15% per 15 days without written contracts, complicating enforcement. Borrowers may fear retaliation, but Republic Act No. 10870 (Philippine Credit Card Industry Regulation Law) and anti-harassment provisions in RA 10173 (Data Privacy Act) offer protections.

For overseas Filipino workers or online loans, jurisdiction may involve cybercrime laws if rates are usurious.

The Securities and Exchange Commission regulates lending companies under RA 9474, requiring registration and capping rates indirectly through oversight.

Conclusion

In summary, a 15% interest rate per 15 days is not legal in the Philippines, as it constitutes an unconscionable and potentially usurious stipulation under prevailing jurisprudence and civil law principles. While deregulation allows flexible rates, judicial intervention protects against exploitation. Borrowers have robust remedies through small claims courts, which offer accessible justice for modest disputes. To avoid pitfalls, parties should ensure transparent, reasonable agreements, and seek legal advice for complex cases. This framework balances economic freedom with consumer safeguards, reflecting the Philippines' commitment to equitable financial practices.