Usury, Unconscionable Interest, and Your Legal Defenses
In the Philippines, the question of whether a specific interest rate is "legal" often leads to a complex intersection of historical laws, central bank circulars, and Supreme Court jurisprudence. If you are looking at a 15% annual interest rate, the short answer is: Yes, it is generally legal and, by modern standards, actually quite reasonable.
However, the "legality" of interest is rarely a black-and-white issue. Understanding why requires a look at the death of Usury Law and the birth of the "Unconscionable" standard.
1. The Death of the Usury Law
For decades, the Philippines followed Act No. 2655, known as the Usury Law, which set strict ceilings on interest rates (e.g., 12% for secured loans, 14% for unsecured loans).
That changed in 1982. The Central Bank (now Bangko Sentral ng Pilipinas) issued CB Circular No. 905, which effectively suspended the Usury Law.
- Current Rule: There is no longer a legally mandated "ceiling" on interest rates in the Philippines.
- Freedom of Contract: Parties are generally free to stipulate whatever interest rate they agree upon in writing.
2. Is 15% Per Annum Legal?
Under the principle of freedom of contract, a 15% annual interest rate is perfectly legal. In fact, compared to other market rates:
- Legal Interest: The current "legal interest" set by the BSP (for judgments or when no rate is written) is 6% per annum.
- Credit Cards: Most credit cards charge between 24% to 36% per annum.
- Micro-lending: Rates here can often exceed 40% to 60% per annum.
By these benchmarks, 15% is considered a relatively low and fair market rate.
3. The "Unconscionable" Exception
While there is no usury ceiling, the Philippine Supreme Court has consistently ruled that the "freedom of contract" is not absolute. Under Article 1306 of the Civil Code, stipulations cannot be contrary to law, morals, good customs, public order, or public policy.
The Courts have the power to equitably reduce interest rates if they are found to be "iniquitous, unconscionable, or shocking to the conscience."
Where is the "Red Line"?
There is no fixed percentage that triggers "unconscionability," but jurisprudence provides a guide:
- 24% per annum (2% per month): Usually upheld as valid.
- 36% per annum (3% per month): Often the "tipping point" where courts begin to scrutinize the fairness of the loan.
- 72% per annum (6% per month) or higher: Almost always declared unconscionable and void by the Supreme Court (e.g., Medel vs. Court of Appeals).
Since 15% is well below these thresholds, it is highly unlikely to be declared unconscionable.
4. Key Legal Defenses Against Excessive Interest
If you find yourself facing an interest rate much higher than 15% (e.g., 5% per month), here are the legal defenses available under Philippine law:
| Defense | Description |
|---|---|
| Lack of Written Agreement | Under Article 1956 of the Civil Code, "No interest shall be due unless it has been expressly stipulated in writing." If the 15% was only verbal, you are only required to pay the principal. |
| Violation of Truth in Lending Act | Republic Act No. 3765 requires lenders to disclose the full cost of the loan (finance charges, incidentals) in writing before the transaction. Failure to do so can result in penalties for the lender. |
| Unconscionability | As discussed, if the rate is "shocking to the conscience," the court can void the interest rate and replace it with the legal rate of 6%. |
| Compounding Interest Issues | Interest on interest (compounding) is only allowed if there is a specific written agreement to that effect. |
5. Summary of the 15% Context
- Standard Loans: 15% is legally binding and enforceable if signed in a contract.
- Default/Judgments: If a court orders someone to pay a debt and no interest was agreed upon, the court will apply 6%, not 15%.
- Banks vs. Individuals: Both are allowed to charge 15% as long as the borrower consents in writing.
Important Note: While the 15% interest rate itself is legal, always check for "hidden" charges like processing fees, service fees, and penalty charges for late payment, as these can significantly increase the Effective Interest Rate (EIR).
Would you like me to draft a demand letter template or a specific clause for a Promissory Note involving this interest rate?