Disputes over interest rates, penalty charges, service fees, and other loan-related costs are among the most common conflicts between borrowers and banks or lending institutions in the Philippines. Borrowers frequently encounter issues such as undisclosed effective interest rates, excessive compounding, hidden administrative fees, unilateral increases in charges, or the application of rates that appear unconscionable relative to the principal. These disputes arise in various loan types, including personal loans, housing loans, car loans, business credit lines, and credit card facilities. Philippine law provides a structured framework of rights and remedies, blending civil law principles, banking regulations, consumer protection statutes, and equitable jurisprudence.

Legal Framework Governing Interest and Loan Charges

The primary sources of law are the Civil Code of the Philippines, special statutes on lending and consumer protection, and regulations issued by the Bangko Sentral ng Pilipinas (BSP).

Under the Civil Code:

Article 1956 requires that interest must be expressly stipulated in writing; otherwise, no interest is due.
Article 1957 provides that interest due and unpaid shall not earn interest unless there is an express written stipulation (prohibiting automatic compounding unless agreed).
Article 1958 and related provisions refer to the legal rate of interest in the absence of stipulation. Since BSP Circular No. 799 (2013), the legal rate for forbearance of money, goods, or credits is six percent (6%) per annum. This rate applies when no interest is stipulated or when the stipulated rate is struck down.
Article 1229 empowers courts to equitably reduce penalty clauses when they are iniquitous or unconscionable.
Article 1306 allows contracting parties to establish stipulations provided they are not contrary to law, morals, good customs, public order, or public policy.

The Usury Law (Act No. 2655, as amended) was effectively rendered inoperative for most loans through Presidential Decree No. 1684 and subsequent BSP circulars, shifting to a market-determined interest rate regime. However, this deregulation does not grant lenders unlimited freedom; courts retain the power to review rates for unconscionability based on equity and public policy.

Key statutes include:

Republic Act No. 3765 (Truth in Lending Act): Mandates full disclosure of the finance charge, the total amount to be financed, the effective interest rate, and all other charges before the credit is extended. Failure to disclose renders the lender liable for damages but does not automatically nullify the contract.
Republic Act No. 7394 (Consumer Act of the Philippines): Protects consumers against deceptive and unfair sales acts and practices, including misleading loan terms.
Republic Act No. 8791 (General Banking Law of 2000): Governs the operations of banks and quasi-banks, requiring fair dealing and compliance with BSP rules on lending.
Republic Act No. 11765 (Financial Products and Services Consumer Protection Act, 2022): Strengthens protections by requiring financial institutions to observe fair treatment, transparent pricing, responsible lending, and effective redress mechanisms. It imposes duties on institutions to avoid abusive practices and provides for administrative sanctions.

BSP issuances, particularly the Manual of Regulations for Banks (MORB) and various circulars on credit card operations, electronic banking, and fair lending practices, further regulate fees, interest computation methods, and disclosure requirements. Banks must maintain internal consumer assistance mechanisms and are subject to BSP oversight for violations.

Grounds for Disputing Interest and Charges

A charge or interest component is disputable when:

Absence or insufficiency of written stipulation – Interest cannot be collected without clear written agreement specifying the rate and manner of computation.
Violation of disclosure requirements under the Truth in Lending Act – This includes failure to state the annual effective interest rate, all fees, or the method of computation in a clear and conspicuous manner.
Unconscionable or iniquitous rates – Even post-usury law repeal, courts may reduce rates deemed excessively disproportionate to the risk and market conditions. Monthly rates exceeding 3–5% have been judicially reduced in numerous cases when they lead to rapid debt ballooning.
Unauthorized compounding – Interest upon unpaid interest is not allowed unless expressly agreed in writing.
Excessive or unreasonable penalties and fees – Late payment penalties, processing fees, insurance charges, or prepayment penalties that are grossly disproportionate may be equitably reduced under Article 1229.
Hidden or unilaterally imposed charges – Fees not disclosed at origination or added without borrower consent (e.g., arbitrary increases in service fees).
Erroneous computation or application – Misapplication of payments (e.g., applying payments first to interest instead of principal when not stipulated), double-charging, or arithmetic errors.
Breach of responsible lending standards under RA 11765 – Extending credit without proper credit assessment or using coercive collection practices.
Fraud, mistake, or undue influence in the execution of the loan agreement that affects the interest or charge provisions.

Administrative Remedies

Borrowers should first exhaust internal remedies before escalating.

Bank-level redress: Most banks are required to maintain a consumer assistance unit or hotline. A formal written complaint detailing the disputed items, supported by documents (promissory note, disclosure statement, amortization schedule, payment history), often triggers review and possible adjustment.
BSP Consumer Assistance: If unresolved, file a complaint with the BSP’s Consumer Assistance Mechanism (CAM) through its website, email, or physical offices. The BSP can mediate, conduct investigations, and impose fines or corrective measures on the bank. For serious or systemic violations, the BSP may initiate enforcement actions.
Other regulators: For non-bank financial institutions, complaints may go to the Securities and Exchange Commission (SEC) or the Insurance Commission if insurance-linked charges are involved. Credit card disputes may also involve the BSP’s Credit Card Regulations.

Administrative complaints are generally faster and less costly than litigation. Resolutions may include refund of overcharges, correction of account records, or waiver of disputed penalties.

Judicial Remedies

When administrative remedies fail or the amounts are substantial, judicial action is available.

Defense in collection suits: When a bank files an action for sum of money or foreclosure, the borrower can raise the disputed interest and charges as affirmative defenses in the Answer. The court may recalculate the outstanding balance, striking out or reducing improper charges.
Independent actions by the borrower:
- Action for declaratory relief (Rule 63, Rules of Court) to determine the validity and correct amount of the obligation.
- Reformation of instrument (Articles 1359–1369, Civil Code) if the written contract fails to express the true intention regarding interest or fees.
- Action for damages under the Truth in Lending Act, Consumer Act, or quasi-delict (Articles 2176 and 2199 et seq., Civil Code). Recoverable damages include actual (overpaid amounts), moral, exemplary, and attorney’s fees.
- Injunction to restrain collection, foreclosure proceedings (under Act No. 3135 for real estate mortgages or Chattel Mortgage Law), or asset seizure pending resolution of the dispute.
Small claims cases: For disputes involving smaller amounts (currently up to Php 1,000,000 in most courts), the simplified Small Claims Court procedure under A.M. No. 08-8-7-SC offers a speedy, lawyer-optional remedy.
Criminal complaints: Rare but possible in cases of estafa, deceit, or falsification if the lender employed fraudulent representations regarding charges. More commonly, violations of banking laws are pursued administratively by the BSP.

Courts consistently apply the principle that while parties enjoy freedom of contract, stipulations must not be oppressive. Precedents illustrate this:

In Medel v. Court of Appeals (G.R. No. 131622, 1998), the Supreme Court reduced a 5.5% monthly interest rate, finding it iniquitous despite the repeal of usury ceilings. Similar reductions occurred in Spouses Solangon v. Salazar and Ruiz v. Court of Appeals, where exorbitant rates were equitably lowered to the legal rate or a reasonable market rate. In cases involving undisclosed charges or improper compounding, courts have ordered recomputation and refunds, often awarding attorney’s fees when bad faith is shown.

The statute of limitations for actions based on written contracts is ten years from the time the right of action accrues (Article 1144, Civil Code). For damages under the Truth in Lending Act, the period is generally four years under the Civil Code’s quasi-delict rules, though specific application depends on the cause of action.

Evidence and Practical Considerations

Successful disputes require strong documentation: the original loan agreement, disclosure statements, payment receipts or bank statements, demand letters, and correspondence with the lender. Borrowers should compute the correct obligation independently—principal plus agreed interest minus payments properly applied—to demonstrate overcharges.

Amortization schedules must be scrutinized for front-loaded interest or hidden fees. Prepayment should be evaluated against any stipulated penalties, which are also subject to reasonableness review.

In foreclosure proceedings, disputing the underlying debt amount can delay or prevent auction if the borrower posts the required bond or deposits the disputed portion in court.

Conclusion

Philippine law balances the need for a functional credit market with robust protections against abusive lending practices. Borrowers have multiple layered remedies—starting with negotiation and administrative complaints and escalating to judicial intervention—supported by clear statutory mandates for transparency and fairness. The combination of Civil Code equity principles, mandatory disclosure rules, BSP oversight, and consumer protection legislation provides substantial avenues to challenge and rectify disputed interest and bank loan charges. Vigilant review of loan documents at origination and prompt action upon discovering irregularities remain the most effective means of protecting borrower rights.