Dear PAO,
I am trying to get a loan from Y, but he wants to charge an interest rate which I find to be exorbitant. Y, however, claimed that there is no limitation on interest rates and he can impose as high as the sky. I am in dire need of money in order to pay my father’s hospital bills, but I do not want to have a debt with excessive interest. Can a creditor impose whatever interest he wants to a borrower like me?
Mustang
Dear Mustang,
A contract, such as a loan agreement, is defined under Article 1305 of the New Civil Code of the Philippines, as follows:
“A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.”
The parties in a contract are free to stipulate the terms and conditions of their contract, with the only limitation provided under Article 1306 of the same law, which states that:
“The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”
Pursuant thereto, interest in a contract of loan may be established by the parties, and there is no ceiling right now because of the suspension of the Usury Law by Central Bank of the Philippines Circular 905-82, dated Dec. 3, 1982. However, it does not mean that the creditor can impose exorbitant interest rates. This finds support in Pabalan v. Sabnani, GR 211363, Feb. 21, 2023, where the Supreme Court, speaking through Associate Justice Samuel Gaerlan, stated that:
“Conformable to the foregoing pronouncements, "[t]he maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' If the stipulated interest exceeds this standard, the creditor must show that the rate is necessary under current market conditions." The creditor must also show that the parties were on an equal footing when they stipulated on the interest rate.” (Emphasis and underscoring supplied)
The Supreme Court went further and explained equal footing in this wise:
“The determination of whether or not the parties stood on equal footing is necessarily done on a case-to-case basis after careful consideration of relevant factors. For one, the Court shall examine the parties' respective backgrounds and personal circumstances. It must compare the parties to verify if one of them was possibly disadvantaged due to moral dependence, mental weakness, tender age, or other handicap, to warrant protection. This may entail reviewing each parties' educational attainment, employment or professional history, financial status, and other relevant experiences. These factors, among others, will have weight in evaluating whether both parties had the capacity to fully understand and voluntarily consent to the agreement entered into.”
Applying the foregoing to your situation, although there is no statutory ceiling on interest rates, this does not mean that the creditor can impose an interest which crosses the line of conscionability. As a general rule, an interest rate exceeding twice the prevailing legal rate may be considered unconscionable. In such a case, the creditor must show that the stipulated interest is necessary under current market conditions and that the parties are on equal footing when they stipulated on the interest rate. Your position, where you are in dire need of money to settle your father’s hospital bills, among other relevant factors, will be considered to determine whether the interest rate is unconscionable under the circumstances.
We hope that we were able to answer your query. This advice was solely based on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.
Thank you for your trust and support.
Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to dearpao@ manilatimes.net
