I. Introduction

Private loans—often between individuals, relatives, friends, employers and employees, business partners, or informal lenders—commonly start with simple promissory notes or even verbal agreements. Disputes arise when the lender later increases the interest rate (or adds “penalties,” “service fees,” “collection charges,” or “compounded interest”) beyond what the borrower agreed to.

In Philippine law, the core principles are straightforward:

Interest is never presumed and must be expressly stipulated in writing to be enforceable.
Any increase in interest is a contract modification that generally requires a meeting of minds—not a unilateral decision by the lender.
Even if agreed, courts can strike down or reduce interest and related charges that are unconscionable, iniquitous, or contrary to public policy.

This article explains the governing rules, what makes an interest increase unlawful, and the practical remedies and defenses available in litigation or negotiation.

This article is for general legal information in the Philippine setting and is not a substitute for advice on specific facts.

II. Key Legal Framework

A. Civil Code rules on loans and interest

Private loans are usually mutuum (simple loan) under the Civil Code: the borrower receives money and must return the same amount.

Key Civil Code provisions and doctrines commonly invoked:

Binding force of contracts: Contracts have the force of law between the parties (so long as not contrary to law, morals, good customs, public order, or public policy).
Mutuality of contracts (Article 1308): A contract’s validity and compliance cannot be left to the will of one party. This is central to unlawful unilateral increases.
Interest must be in writing (Article 1956):
- If interest is not expressly stipulated in writing, the lender generally cannot collect interest as contractual interest.
Anatocism / interest on interest (Articles 1959 and 2212):
- Unpaid interest generally does not earn interest unless the law allows (e.g., from judicial demand) or the parties validly stipulate capitalization under proper conditions.
Penalty clauses may be reduced (Article 1229):
- Penalties (including penalty interest) may be equitably reduced if iniquitous or unconscionable.

B. “Usury” after interest ceilings were lifted

Historically, the Philippines had statutory interest ceilings under the Usury Law (Act No. 2655). These ceilings were later effectively lifted by Central Bank issuance (commonly discussed in jurisprudence), leading to the modern reality:

Parties may stipulate interest rates, but
Courts retain the power to intervene when rates or charges are unconscionable or when escalation is unilateral or violates mutuality/public policy.

So, today’s disputes are less about a numeric ceiling and more about consent, written stipulation, mutuality, fairness, and public policy.

C. Legal interest (default interest set by law)

When there is no valid stipulated interest, or when a borrower is in delay (default), courts may impose legal interest as damages depending on the circumstances and the controlling Supreme Court guidelines on interest in obligations and judgments. In practice today, courts often apply 6% per annum as the modern legal interest baseline, subject to the doctrinal rules on when it begins to run (e.g., from demand or from finality of judgment).

III. What Counts as an “Interest Rate Increase” in Private Loans

Lenders sometimes “increase interest” openly; often it is disguised. Common forms include:

Increasing the stated monthly/annual interest (e.g., from 5% per month to 10% per month) without a signed amendment.
Imposing a higher “default interest” upon missed payments without a valid penalty clause or beyond a reasonable penalty.
Charging “service fees,” “processing fees,” “collection fees,” or “roll-over fees” that function like interest.
Compounding: adding unpaid interest to principal (“capitalization”) so that future interest is computed on a bigger base.
Deducting interest in advance (discounting) and later increasing the deduction or the effective rate.
Changing the computation method (e.g., from simple interest to compounded interest; from declining balance to add-on) that raises the effective rate.

In litigation, courts look at substance over labels. If a charge is essentially the price of money or the cost of extending the loan, it may be treated as interest or interest-like—and evaluated for validity and fairness.

IV. When an Interest Increase Is Unlawful (Core Grounds)

Ground 1: No written stipulation (or no written stipulation of the increased rate)

Rule: Contractual interest must be expressly stipulated in writing. Implications:

If the original loan has no written interest clause, the lender generally cannot collect contractual interest (though legal interest as damages may apply upon default).
If the loan has a written interest clause, but the increase was only agreed verbally or imposed by text/chat without a signed agreement, the borrower can argue that the increased rate is unenforceable.

Practical result: At most, the lender may recover:

Principal, and
Valid stipulated interest (if any), or otherwise legal interest as damages from demand/default, depending on the facts and rulings.

Ground 2: Unilateral escalation violates mutuality of contracts

An escalation clause or “adjustable interest” arrangement becomes problematic when it effectively lets the lender say:

“I can increase interest anytime at my discretion,” or
“Interest will be subject to change as I see fit,”

without an objective basis and without meaningful borrower consent.

Philippine contract law rejects terms that leave performance or compliance to one party’s will. Even if a document contains an escalation clause, it may be attacked if:

It is purely discretionary on the lender,
It lacks objective standards or a clear external basis,
It lacks a meaningful mechanism showing the borrower’s consent to specific increases, or
It is one-sided without balancing features (in bank jurisprudence this often appears as a requirement of fairness, notice/consent, and a workable de-escalation concept; in private lending the principle is still mutuality and consent).

Practical result: Courts often ignore the increased rate and revert to the last valid, agreed rate (or no stipulated interest, if the underlying interest clause itself is defective).

Ground 3: The increase is unconscionable / iniquitous / contrary to public policy

Even where there is written consent, courts may intervene when the interest is shocking to the conscience or grossly excessive relative to the circumstances.

Indicators courts consider (not a strict checklist):

Extremely high monthly interest (especially double-digit monthly rates),
Excessive penalty interest on top of already high interest,
Layering fees that push the effective rate to oppressive levels,
Exploitative bargaining positions (necessitous borrower, urgent medical needs, etc.),
Lack of transparency and abusive collection practices (while collection practices may be a separate issue, they color equity).

Practical result: Courts may:

Reduce the interest to a more reasonable rate,
Strike penalty charges,
Treat some amounts as unenforceable,
Apply legal interest rules instead.

Ground 4: The increase is imposed through invalid penalties or liquidated damages

Many promissory notes include “penalty” or “additional interest” upon default. This can be lawful in principle, but penalty clauses are subject to equitable reduction.

Problems include:

Penalty interest that is disproportionate to the harm caused by delay,
Penalty stacked with high compensatory interest,
Penalty computed in a way that becomes confiscatory,
Penalty that effectively transforms into a perpetual escalating burden.

Practical result: Courts may reduce penalties and, in some cases, treat them as void as against equity/public policy.

Ground 5: Illegal or improper compounding (anatocism)

Compounding is not automatically illegal, but it is frequently mishandled in private loans.

Common unlawful patterns:

“Interest on interest” charged without proper legal basis (e.g., automatic monthly capitalization with no clear, enforceable stipulation),
Adding unpaid interest to principal and charging further interest without satisfying doctrinal requirements,
Using “renewals” or “rollovers” that repeatedly capitalize interest and inflate principal without clear consent.

Practical result: The borrower can challenge the inflated balance and seek recomputation based on lawful rules.

V. Evidence and Burden: What Matters in Court

A. Documents control

In disputes about interest, courts typically prioritize:

Promissory note/loan agreement
Any written addendum or amendment
Receipts, ledgers, acknowledgments
Demand letters and responses
Proof of payments (bank transfers, remittance slips, screenshots—ideally corroborated)

Because interest must be in writing, the lender’s ability to enforce increased interest depends heavily on producing a signed written agreement clearly stating the new rate and when it applies.

B. Parol evidence and “side agreements”

If there is a written contract, changing its terms via alleged verbal side agreements is difficult due to evidentiary rules (with exceptions). The borrower typically argues:

The written contract is the best evidence,
Any increase is a modification requiring the same level of proof and consent,
In interest disputes, the Civil Code’s writing requirement is decisive.

C. Payment history can cut both ways

If a borrower paid higher interest for some time, lenders argue “implied acceptance.” Borrowers counter:

Interest must be expressly stipulated in writing; conduct cannot cure an invalid interest stipulation requirement.
Payments may have been made under mistake, necessity, fear of harassment, or to avoid threatened criminal complaints (common in informal lending contexts).
Any excess may be treated as payment not due (potential restitution or application to principal), depending on the case theory and findings.

VI. Borrower’s Legal Defenses (Substantive and Procedural)

Below are common defenses when facing a demand or lawsuit seeking increased interest.

1) No enforceable interest / no enforceable increase (Article 1956)

Defense: Interest (or increased interest) not expressly stipulated in writing.
Relief sought: Principal only, or principal plus only the original valid written interest (if any), not the increase.

2) Void unilateral escalation (mutuality of contracts)

Defense: Rate increases left to lender’s will; escalation clause void; increase unenforceable.

3) Unconscionable interest / iniquitous penalty

Defense: Rate and/or penalties oppressive, contrary to morals/public policy; request reduction or nullification.

4) Improper compounding / anatocism

Defense: Lender’s computation unlawfully capitalizes interest; request recomputation.

5) Payment application and recomputation

Defense: Payments should be applied correctly; if interest is void or reduced, amounts paid should be applied to principal; demand accurate accounting.

6) Lack of proper demand / timing issues

This matters primarily when the lender seeks legal interest or damages for delay:

Defense: No clear extrajudicial demand; delay not established; legal interest (as damages) not yet running or should run later.

7) Set-off / counterclaims

Possible counterclaims (fact-dependent):

Recovery of excess interest paid (as payment not due / equitable restitution),
Damages for abusive collection methods (if properly proven and legally grounded),
Attorney’s fees where allowed.

8) Consignation / tender of payment (to avoid being in default)

If the borrower admits owing principal (and maybe some valid interest) but disputes the increase:

Tender payment of the admitted amount.
If refused, consider consignation to prevent further default consequences—used carefully because it has strict requirements.

VII. Borrower’s Remedies (What You Can Ask a Court To Do)

A. Declare the increased rate unenforceable; enforce only the original valid terms

A common outcome is: principal + valid interest only, without the unlawful increases.

B. Judicial reduction of interest and penalties

Courts may:

Reduce contractual interest to a reasonable level,
Reduce penalty charges under equitable powers,
Impose legal interest instead (depending on posture and findings).

C. Accounting / recomputation

Borrowers can request a full accounting and a court-ordered recomputation:

Identify principal,
Determine enforceable interest,
Remove invalid charges,
Reapply payments properly,
Determine remaining balance.

D. Restitution or application to principal of excess payments

If the borrower paid amounts that are later found not due, courts may:

Apply overpayments to reduce principal, and/or
Order partial reimbursement depending on the theory pleaded and findings.

E. Injunctive relief (limited and fact-specific)

In extreme cases (e.g., imminent foreclosure-like actions, harassment linked to collection), injunction may be sought, but Philippine courts require clear grounds; for pure money claims, injunction is not automatic.

VIII. Lender’s Perspective: When an Interest Increase Can Be Enforced

Not all interest increases are unlawful. A lender is in a stronger position when:

The original interest and any increase are clearly in writing, signed by the borrower.
The increase is part of a valid amendment/novation, with clear consent and consideration (e.g., restructuring, extended term).
The adjustment is tied to objective criteria agreed upon (e.g., an external index or clearly defined triggers), not pure discretion.
Penalties are reasonable and not oppressive.
The lender’s computations avoid improper compounding and follow the agreed method.

A lender seeking enforceability should expect scrutiny on:

Documentation,
Transparency,
Reasonableness,
Good faith.

IX. Typical Litigation Scenarios and How Courts Commonly Approach Them

Scenario 1: “Verbal increase” after default

Loan note: 3% monthly interest written.
Lender later says: “Now it’s 10% monthly because you’re late.”
Borrower did not sign an amendment.

Likely judicial approach: enforce 3% (if valid), reject 10% as unagreed/unwritten; possibly allow a reasonable penalty if a valid penalty clause exists and is not excessive.

Scenario 2: “Interest not written” but lender demands monthly interest anyway

Loan was agreed by chat or verbal; no signed document stating interest.

Likely judicial approach: principal due; contractual interest denied; legal interest as damages may apply from demand/default.

Scenario 3: Escalation clause: “interest may be increased at lender’s discretion”

Promissory note contains discretionary escalation language.

Likely judicial approach: escalation feature attacked as void for lack of mutuality; apply original rate (if valid), or remove interest if the clause makes the interest provision uncertain/defective.

Scenario 4: Penalty interest + high base interest + compounding

6% monthly base interest
plus 5% monthly penalty
plus monthly capitalization of unpaid interest

Likely judicial approach: heavy risk of being deemed unconscionable; courts may reduce drastically, remove penalties, and recompute.

X. Practical Guide to Evaluating a Disputed Interest Increase (Checklist)

Step 1: Identify the controlling writing

Is there a signed promissory note/contract?
Does it state an interest rate clearly?
Does it state how interest is computed (simple vs compounded; monthly vs annual)?

Step 2: Look for a signed amendment

Is the increased rate expressly stated in a signed writing?
Is it dated, and does it specify when the increase begins?

Step 3: Evaluate any escalation clause

Is it discretionary or tied to objective standards?
Does it preserve mutuality, or is it one-sided?

Step 4: Separate “interest” from “penalty” and “fees”

Determine the effective rate including add-ons.
Identify compounding or hidden charges.

Step 5: Reconstruct the accounting

Principal disbursed (net of any deductions).
Payments made.
How payments were applied.
Remaining principal and lawful interest.

XI. Drafting and Documentation Lessons (Prevention)

For parties who want enforceable, fair adjustable interest in a private loan:

Put all interest terms in writing.
Avoid “at my discretion” language; instead specify objective adjustment mechanisms.
State whether interest is simple or compounded; if compounding/capitalization is intended, stipulate it clearly and ensure it aligns with legal doctrines.
Keep penalties modest and defensible.
Provide clear amortization or computation examples.
Document any restructuring via a signed amendment (and ideally notarize for evidentiary strength).

XII. Key Takeaways

No written stipulation, no contractual interest—and increases are even harder to enforce without writing.
Unilateral interest hikes are vulnerable under the principle of mutuality of contracts.
Courts can reduce or strike unconscionable rates, penalty interest, and abusive add-on charges even if there is written consent.
Compounding and “interest on interest” are frequent fault lines; improper capitalization can materially change outcomes.
Remedies typically focus on recomputation: principal + lawful interest + equitable adjustment of penalties, with possible application/refund of excess payments depending on the case.