In the Philippines, the "5-6" lending system and predatory online lending apps (OLAs) have made high-interest loans a common reality for many. However, a rate of 15% per week—which translates to roughly 60% per month or a staggering 720% per year—is not just aggressive; it is legally indefensible.
While the Philippines technically "suspended" the Usury Law years ago, this does not give lenders a blank check to charge whatever they wish. Here is a breakdown of your legal standing and how to contest such rates.
1. The Legal Standard: Freedom of Contract vs. Equity
Under Article 1306 of the Civil Code, parties are free to establish stipulations, clauses, terms, and conditions as they may deem convenient. However, there is a critical caveat: these stipulations must not be contrary to law, morals, good customs, public order, or public policy.
The Philippine Supreme Court has consistently ruled that while the Usury Law is currently legally "inactive" (meaning there is no fixed ceiling for interest), the courts have the power to equitably reduce interest rates if they are found to be:
- Iniquitous
- Unconscionable
- Exorbitant
- Shocking to the senses
2. Is 15% Weekly Interest "Unconscionable"?
Yes. In various landmark cases, the Supreme Court has struck down interest rates far lower than 15% per week.
- Jurisprudence: In Medel vs. Court of Appeals, the Court ruled that an interest rate of 5.5% per month (66% per annum) was "iniquitous and unconscionable."
- The 15% Case: A 15% weekly rate is nearly ten times higher than what the Court found objectionable in previous rulings. Such a rate is considered void ab initio (void from the beginning) regarding the interest component.
Note: When a court declares an interest rate void for being unconscionable, it does not mean you don't have to pay the debt. Usually, the court will strike down the 15% rate and replace it with the legal interest rate (currently 6% per annum) or a "reasonable" rate (often 12% per annum in older cases or specific damages).
3. The "Lending Company Regulation Act" (RA 9474)
If the lender is a corporation or a formal lending entity, they are governed by the Securities and Exchange Commission (SEC). Under SEC Memorandum Circular No. 3 (Series of 2022), there are now specific caps on interest and fees for short-term consumer loans:
- Nominal Interest Rate: Capped at 0.167% per day (approx. 5% per month).
- Effective Interest Rate: Capped at 15% per month (including all fees).
A 15% weekly rate (60% monthly) violates these SEC regulations, exposing the lender to heavy fines and the revocation of their Certificate of Authority.
4. How to Contest the Interest Rate
If you are trapped in a loan with a 15% weekly interest rate, you have several avenues for recourse:
| Action Step | Description |
|---|---|
| Negotiate in Writing | Inform the lender (via formal letter) that the 15% weekly rate is "unconscionable" based on Supreme Court jurisprudence and offer to pay the principal plus a reasonable interest (e.g., 1% per month). |
| SEC Complaint | If the lender is an Online Lending App (OLA) or a registered company, file a formal complaint with the SEC Corporate Governance and Finance Department. |
| Barangay Conciliation | For individual lenders, bring the matter to the Lupong Tagapamayapa. Use the mediation phase to argue that the interest is illegal and ask for a restructuring based on legal rates. |
| Judicial Action | If the lender sues you for collection, your defense should be that the interest is "void for being contrary to public policy." The court will likely reduce the interest to the legal rate of 6% per annum. |
5. Can You Go to Jail for Not Paying?
It is a fundamental principle in the Philippines (Article III, Section 20 of the Constitution) that no person shall be imprisoned for debt. However, lenders often use harassment or "shaming" tactics. If a lender threatens you or accesses your contact list (common with OLAs), they may be violating the Data Privacy Act of 2012 or the Cybercrime Prevention Act, giving you further grounds to file criminal charges against them.
Summary
A 15% weekly interest rate is legally indefensible in the Philippines. While you are still obligated to pay the principal amount you borrowed, the law protects you from "predatory" interest that makes repayment impossible.
Would you like me to draft a formal demand letter or a notice to the lender contesting the interest rate based on these legal grounds?