Query: Are verbal loan agreements with interest enforceable in the Philippines, and how can one address disputes regarding such agreements?

In the Philippines, verbal loan agreements are generally enforceable, provided that the essential elements of a contract are present: consent, object, and cause. The enforceability of such agreements can become complex when disputes arise, especially concerning the amount of interest paid and the terms of repayment. Here, we discuss the legal context and practical steps to address disputes related to verbal loan agreements with interest payments.

Legal Basis for Verbal Loan Agreements

Under Philippine law, contracts are generally valid and enforceable regardless of their form, as long as they contain the essential requisites of consent, object, and cause as stipulated in Article 1305 of the Civil Code of the Philippines. This includes verbal agreements, provided there is mutual consent between the parties. However, the challenge with verbal agreements lies in proving their terms and conditions, particularly in the absence of written documentation.

Interest Rates and Usury Law

The Philippines adheres to regulations on interest rates to prevent usury, governed by Republic Act No. 3765, also known as the Truth in Lending Act, and subsequent Bangko Sentral ng Pilipinas (BSP) Circulars. The Usury Law, as amended by Presidential Decree No. 116, previously capped interest rates but has since been largely deregulated. Nevertheless, exorbitant or unconscionable interest rates may be challenged in court as being contrary to public policy.

Proving a Verbal Loan Agreement

In cases of dispute, proving the existence and terms of a verbal loan agreement may involve:

Testimonies: Both parties and witnesses can testify to the terms agreed upon.
Receipts and Records: Proof of payments made, such as bank records or receipts, can help establish the amount and frequency of interest payments.
Admissions: Any written or recorded admissions by the creditor regarding the loan terms can be critical evidence.

Addressing Disputes Amicably

Given the absence of a written agreement, resolving disputes amicably is often the most practical approach. Here are steps to consider:

Negotiation: Initiate a dialogue with the creditor to discuss the financial hardship and propose a revised payment plan. Highlight the interest already paid, particularly if it exceeds the principal.
Mediation: If direct negotiation fails, consider mediation through a neutral third party. The Barangay Justice System under the Local Government Code provides a mechanism for resolving disputes amicably at the community level.
Legal Counsel: If mediation is unsuccessful, seek legal advice. A lawyer can help assess the strength of the case, gather evidence, and represent the borrower in court if necessary.
Documentation of Settlement: Any agreement reached should be documented in writing, specifying the new terms and conditions to prevent future disputes.

Court Intervention

If an amicable resolution is not possible, legal action may be required. The borrower can file a complaint to:

Question the Interest Rate: Challenge the interest rate as excessive or unconscionable under the Civil Code.
Recompute the Debt: Request a court order to recompute the total debt based on the principal and a reasonable interest rate.
Enforce Equitable Relief: Seek equitable relief to prevent the creditor from enforcing immediate payment under harsh terms.

Conclusion

Verbal loan agreements with interest are legally binding in the Philippines, but proving their terms can be challenging. Addressing disputes requires a combination of negotiation, mediation, and, if necessary, legal action. Borrowers should document any settlements to avoid future conflicts and ensure that any interest rates applied are fair and reasonable.