Below is a comprehensive discussion of the legal landscape and available remedies for excessive loan interest in the Philippines, including relevant laws, regulatory frameworks, and judicial doctrines.

1. Overview of Philippine Laws on Interest Rates

1.1. Usury Law (Act No. 2655)

Historically, the principal statute governing interest rates in the Philippines was the Usury Law (Act No. 2655), which set legal ceilings on the rate of interest that lenders could charge. Over time, however, this law was effectively “suspended” or rendered largely moot by subsequent issuances of the Central Bank (now the Bangko Sentral ng Pilipinas, or BSP).

The most notable BSP issuance is CB Circular No. 905 (Series of 1982), which removed fixed ceilings on interest rates. As a result, contracting parties were generally free to stipulate the interest rate on a loan, subject to the broader limits of law, good morals, public order, or public policy.

1.2. The New Civil Code of the Philippines

The Civil Code provides foundational rules on contracts and obligations in the Philippines. Relevant provisions include:

Article 1306: The contracting parties may establish any stipulations, clauses, terms, and conditions as they may deem convenient, provided these are not contrary to law, morals, good customs, public order, or public policy.
Article 1229: When a penalty clause (or a stipulation like interest) is iniquitous or unconscionable, the courts shall reduce its amount. Although Article 1229 primarily refers to penalty clauses, Philippine jurisprudence extends the principle to contractual interest rates.
Article 2209: Provides for legal interest in cases where an obligation is breached and no interest rate has been stipulated. This provision serves as a default legal interest, but it is primarily invoked in judicial awards rather than private loans per se.

1.3. Role of the Bangko Sentral ng Pilipinas (BSP)

Since the Usury Law ceased to impose fixed ceilings, the BSP retains the authority to regulate interest rates as needed through Circulars and regulations. On occasion, the BSP has prescribed caps on credit card interest or specific lending arrangements, but broadly speaking, most interest rates are subject to market forces—while still being subject to reduction by courts if deemed unconscionable.

1.4. The Lending Company Regulation Act of 2007 (RA 9474)

Under Republic Act No. 9474, known as the Lending Company Regulation Act, lending companies are required to register with the Securities and Exchange Commission (SEC), abide by disclosure rules, and comply with regulations on penalties, charges, and interest. Although the Act does not fix a specific cap on interest, it mandates that lending companies must disclose their effective interest rate and other finance charges clearly to borrowers.

2. Determining Whether an Interest Rate Is “Excessive” or “Unconscionable”

Because there is no legislatively prescribed cap for general loan interest, Philippine courts look for indicators that a given rate is:

Unconscionable: So grossly excessive that it “shocks the conscience” given the circumstances; or
Iniquitous: Significantly unfair to one party, given the nature of the loan, the borrower’s financial capacity, the risk undertaken by the lender, and prevailing market conditions.

Philippine jurisprudence has provided some guidance:

Case law has declared interest rates such as 5% per month (or 60% per year) and 6% per month (72% per year) as potentially unconscionable, depending on the context.
Courts often reduce such rates to something more in line with conventional commercial practice.
There is no hard-and-fast rule stating, for example, “any interest rate above __% per annum is automatically void.” Instead, courts assess the totality of circumstances (e.g., was the borrower coerced? was there fraud? was the borrower a sophisticated business entity or an unsophisticated debtor?).

3. Legal Remedies for Excessive or Unconscionable Interest

Borrowers who believe they are being charged excessive or unconscionable interest have various legal avenues:

3.1. Judicial Reduction of Interest

Under Article 1229 of the Civil Code, courts have the power to reduce iniquitous or unconscionable contractual interest rates. If a borrower is sued for nonpayment, they may raise the defense that the stipulated interest is unconscionable. The court can then:

Declare the interest void and not enforceable; or
Reduce it to a fair and reasonable rate, based on prevailing jurisprudence and the circumstances surrounding the contract.

3.2. Filing a Civil Case for Annulment or Reformation of Contract

If the borrower has already entered into a loan agreement with an excessive interest rate, they may file a civil action seeking:

Annulment of the interest stipulation for being contrary to morals, good customs, or public policy; or
Reformation of the contract to align its terms with equity, if there was fraud or mistake in the drafting.

While courts generally prefer to enforce contracts as written, an unconscionable interest clause can be struck down or modified.

3.3. Defenses in Collection Suits

When a lender files a collection lawsuit for nonpayment of loan obligations, the borrower can raise the defense that the interest rate (and any penalty charges) are usurious, immoral, or unconscionable. The court will examine the stipulations and potentially reduce or invalidate them.

3.4. Administrative Complaints or Actions

Depending on the nature of the lender, borrowers may seek administrative recourse:

If the lender is a bank or financial institution, a borrower can file a complaint with the BSP or with the SEC (in the case of lending companies).
If the lender is operating without the necessary license, or if it is engaging in abusive collection practices, this may be grounds for further administrative or even criminal action under applicable laws (such as for usurious lending, estafa, or harassment).

3.5. Criminal Liability (Usury or Related Offenses)

Strictly speaking, the original Usury Law criminalized charging interest rates above the legal limit. Because BSP Circular No. 905 effectively suspended statutory ceilings, criminal usury charges under the old framework are extremely rare. Still, if a lender employs threats, harassment, or fraudulent acts in collecting on an illegal or excessive interest rate, other criminal statutes (e.g., Grave Threats, Estafa) may apply.

4. Key Jurisprudential Doctrines

4.1. “Unconscionable Interest Rate” Doctrine

In numerous decisions, the Supreme Court has invalidated or reduced stipulated interest rates that were clearly excessive given the facts of each case. While there is no fixed percentage that is automatically deemed unconscionable, rates above 24% to 36% per annum commonly draw judicial scrutiny, especially if the borrower is in a vulnerable position or if there is evidence of overreach by the lender.

4.2. Default Interest vs. Penalty Charges

Philippine courts distinguish between:

Regular interest: The rate agreed upon for the use or forbearance of money.
Default or penalty interest: Additional interest charged upon default.

Even if a stipulated regular interest rate is found acceptable, a disproportionately high penalty interest or late-payment charge can also be reduced as iniquitous under Article 1229.

5. Practical Considerations for Borrowers

Documentation: Keep all loan documents, receipts, and proofs of payment. Clear documentation is crucial for contesting excessive interest in court.
Negotiation: It is often advisable to try negotiating a reduction in interest before or during litigation, possibly through mediation or settlement conferences.
Legal Assistance: Consulting with a lawyer or seeking help from legal aid clinics can guide borrowers on how best to assert the defense of unconscionable interest, as well as navigate any administrative complaints or judicial proceedings.

6. Recommendations for Lenders

Transparency: Disclose the interest rate, penalties, and effective annual percentage rate (APR) clearly, in compliance with laws such as the Lending Company Regulation Act (RA 9474).
Fair Contract Stipulations: Keep interest and penalty clauses within a reasonable range to avoid legal challenges.
Compliance with BSP and SEC Regulations: Regularly monitor BSP Circulars and SEC regulations governing lending practices and interest rates to ensure legal compliance.

7. Conclusion

While Philippine law no longer imposes fixed statutory ceilings on loan interest rates under the old Usury Law, lenders are not given carte blanche to charge exorbitant rates. The Supreme Court, applying the Civil Code and longstanding jurisprudence, can strike down or reduce interest rates that it deems unconscionable or contrary to public policy.

Borrowers burdened by an exorbitant interest rate may seek redress through the courts, either offensively (by filing a suit for annulment or reformation) or defensively (when sued for nonpayment). Additionally, administrative complaints with the BSP or SEC may be appropriate if the lender is regulated and has breached applicable regulations.

Ultimately, the key principle is fairness. Philippine courts consistently emphasize that while freedom to contract is paramount, it is not absolute. When interest rates are so high that they become oppressive, the law intervenes to level the playing field, ensuring that loan agreements serve not just the lender’s interest, but also broader principles of equity and justice.