Dear Attorney,

I am writing to you on behalf of a borrower (referred to hereafter as “the Borrower”) who seeks clarification regarding a loan arrangement. This individual wishes to remain anonymous. The Borrower originally obtained a sum of money amounting to Fifty Thousand Pesos (PHP 50,000.00) with an agreement to pay interest at a rate of eight percent (8%) for six (6) months, which consequently required a payment of Twenty-Four Thousand Pesos (PHP 24,000.00) over the same period. After one (1) year, the Borrower managed to earn some returns amounting to Fifty-Two Thousand Pesos (PHP 52,000.00). However, the lender (“the Lender”) now demands that additional monthly interest payments be made from this point forward, with the Borrower channeling One Thousand Pesos (PHP 1,000.00) per month toward the principal loan, while Three Thousand Pesos (PHP 3,000.00) per month remains treated as continuing interest or gains.

The Borrower is concerned about the legality, fairness, and overall structure of this continuing interest arrangement and wants to know if it is valid under Philippine law. The Borrower also wants to confirm whether the Lender’s demand for an extended monthly interest is enforceable and if there are any available legal remedies to rectify the situation.

We would deeply appreciate your guidance and legal opinion on the matter.

Sincerely,
A Concerned Individual

LEGAL ARTICLE: A METICULOUS ANALYSIS FOR THE PHILIPPINE SETTING

Disclaimer: This discussion is for informational purposes only and is not intended as a substitute for formal legal advice. It is important to consult a lawyer for specific applications of legal principles to particular circumstances.

In the Philippines, the primary laws and regulations governing loan agreements, interest rates, and related concerns include the Civil Code of the Philippines, particularly the provisions on obligations and contracts; the Usury Law (Act No. 2655, as amended); pertinent Central Bank circulars and Bangko Sentral ng Pilipinas (BSP) rules; as well as jurisprudential guidelines from the Supreme Court.

In this article, we shall delve into each of these legal bases to examine crucial concepts that affect the scenario described above. We will pay close attention to (1) the essential elements of a contract of loan, (2) permissible interest rates under Philippine law, (3) the doctrine on unconscionable interest rates or usurious transactions, (4) penalty stipulations and surcharges, (5) the application of the principle of mutuality of contracts, and (6) available legal remedies and defenses for borrowers and lenders.

I. Contracts of Loan in General

Under the Civil Code of the Philippines, particularly Articles 1933 to 1961, a contract of loan (mutuum) is formed when one of the parties delivers to the other money or other consumable goods with the condition that the same amount of the same kind and quality shall be paid back. The two primary components of such contracts are:

Delivery of a Sum of Money or Consumable Goods – The lender must deliver money or consumable goods to the borrower.
Obligation to Return the Same Amount of the Same Kind and Quality – The borrower must pay back the same amount or same quantity of goods.

Because money is fungible, repayment of the principal plus stipulated interest (if any) is the essence of the borrower’s obligation. In the scenario provided, a contract of loan was clearly formed when the Borrower received Fifty Thousand Pesos (PHP 50,000.00) from the Lender.

II. Permissible Interest Rates Under Philippine Law

The interest rate applicable to a loan contract may be stipulated by the parties. However, it must be emphasized that such interest rates are subject to certain legal limitations and rules. Historically, the Usury Law (Act No. 2655) capped interest rates. Eventually, with the issuance of Central Bank Circular No. 905 (s. 1982), interest rate ceilings were effectively lifted, giving the contracting parties freedom to stipulate the interest rates in their loan agreements.

However, despite the liberalization of interest rates, courts in the Philippines have the authority to intervene if the stipulated interest rate is found to be unconscionable. The Supreme Court has consistently held that, while interest rates can be freely stipulated, they may still be struck down or equitably reduced if they are iniquitous or unconscionable.

III. The Doctrine on Unconscionable or Usurious Rates

Although the usury law ceilings are considered legally inoperative as of now, the long-standing principle remains that Philippine courts will not sanction exorbitant or unconscionable interest rates. The relevant concept is that, if an interest rate is so high as to be “morally unacceptable,” the courts may reduce or nullify the interest in order to achieve equity and fairness.

Jurisprudence

Several Supreme Court decisions note that an interest rate of 3% per month (36% per annum) and above may be struck down as iniquitous, depending on the totality of the circumstances. Yet, there is no absolute formula; the Court judges based on reasonableness and equity.
In Medel v. Court of Appeals (G.R. No. 131622, 27 November 1998), the Supreme Court found a 5.5% monthly interest rate to be unconscionable.
Meanwhile, in other cases, even a 3% monthly interest rate was viewed as potentially unconscionable, prompting the Court to reduce it to a more equitable figure.

Nevertheless, these rulings underscore the principle that a court can void or modify interest obligations it considers exorbitant. When analyzing the interest in the scenario at hand, we see that the agreement effectively contemplates an interest rate that may be considered extremely high once the extended terms are factored in.

IV. Analyzing the Stipulated Interest in the Present Scenario

Initial Arrangement
- The Borrower took out a loan of PHP 50,000.00.
- The interest was presumably pegged at 8% but paid out as PHP 24,000.00 for six (6) months. The first question that arises is how exactly that 8% was computed. If 8% is the interest for the entire six-month period, then the calculation might be different from standard monthly or annual compounding rates. We also must clarify whether 8% refers to a monthly interest rate or if the 8% was an “effective rate.” If it were 8% per month, the total interest for six months would be 48% of principal. The figure of PHP 24,000.00 in interest on a principal of PHP 50,000.00 is roughly 48% of the principal—over six months. That is arguably high, but not automatically void if the parties freely consented and if no element of fraud, intimidation, undue influence, or gross overreaching was present.
Subsequent Arrangement
- After a period of one (1) year, the Borrower claims to have earned PHP 52,000.00 in returns. The Lender now demands an additional monthly “tubo” or interest arrangement such that:
  - PHP 1,000.00 monthly is counted toward the principal of PHP 50,000.00.
  - PHP 3,000.00 monthly is treated as continuing interest.
This set-up effectively suggests a monthly interest of PHP 3,000.00 on a principal of PHP 50,000.00, which translates to a 6% monthly interest. That is 72% per year if we conceptualize it strictly in annual terms. Many courts, when faced with such an interest rate, might consider it excessive, depending on how the parties negotiated and the presence or absence of free will.
Excessive vs. Usurious
- Under the earlier regime of the Usury Law, interest rates above 12% per annum could be considered usurious. But that law has been effectively rendered inoperative. Still, there is a continuing impetus for courts to examine whether an interest rate is unconscionable. A 6% monthly interest rate is typically considered extremely high in conventional lending scenarios. This could lead a court to moderate the interest.
Possible Penalties, Additional Fees, or Hidden Charges
- If a portion of the monthly payment is being arbitrarily allocated to “interest on interest,” such compounding can be subject to scrutiny. Under the Civil Code (Article 1959), interest due and unpaid shall not earn interest unless there is a stipulation to capitalize the interest. Even if there is such a stipulation, it should not run afoul of laws against unconscionable interest.

V. Mutuality of Contracts and the Requirement of Consent

The principle of mutuality of contracts, as enshrined in Article 1308 of the Civil Code, states that a contract must bind both parties, and its validity or compliance cannot be left to the will of one of them. Each party must consent freely to any change in the terms and conditions of the agreement. If the Borrower feels coerced into agreeing to an arrangement that severely disadvantages him or her, that can raise issues of validity.

Key Points

If the Lender unilaterally imposes an additional monthly interest that was not part of the original agreement, the Borrower would have grounds to dispute the new arrangement on the basis of lack of consent.
Even if the Borrower “agreed,” but under some form of compulsion or without full and informed consent, there may be a question of voluntariness, especially if the Borrower did not fully understand the ramifications of such terms.

VI. Remedies and Defenses

Negotiation and Settlement
The first practical approach is for the Borrower to attempt an amicable settlement with the Lender. By explaining that the interest arrangement is excessive, both parties can explore a more reasonable interest structure or a lump-sum payoff of the principal plus a sensible interest.
Judicial Relief
- Should the Borrower file a case in court, the Borrower could invoke jurisprudence on unconscionable or iniquitous interest rates. The court may be persuaded to reduce the interest to a more equitable level.
- Philippine courts have broad powers to modify excessively high interest rates, especially if they verge on being unconscionable.
Invocation of Civil Code Provisions
- Article 1229 of the Civil Code allows courts to reduce a penalty or an interest rate if it is iniquitous or unconscionable. This provision is frequently invoked in loan cases with exorbitant stipulations.
- Article 1409 (on void or inexistent contracts) may come into play if there is a question of public policy. However, more commonly, the entire contract is not voided; only the iniquitous stipulation is stricken or modified.
Payment and Consignation
- If the Borrower is able and willing to pay the principal plus a reasonable interest but the Lender refuses to accept partial or negotiated payment, the Borrower could resort to the legal process of consignation. This involves depositing the amount due in court, thereby extinguishing the obligation to the extent of the deposit.
Penalty for Usurious Acts?
- Considering that official interest rate ceilings have long been lifted, the notion of “usury” as a crime is practically moot. Nonetheless, imposing unconscionable interest can still be challenged civilly.

VII. Conclusion: Validity of the Continuing Interest Demands

Based on the above discussion, the key issues that must be addressed in the Borrower’s predicament are:

Whether the New Terms Were Validly and Voluntarily Agreed Upon
The Lender appears to be unilaterally imposing a new monthly interest scheme, which might not have been covered by the original loan agreement. If it was not part of the original contract, the Borrower is within his or her rights to contest it.
Whether the Proposed 6% Monthly Interest (PHP 3,000 on a PHP 50,000 Principal) is Unconscionable
Jurisprudence suggests that courts tend to reduce excessively high interest rates. If 6% per month is regarded by the courts as unconscionable, that portion of the contract may be reformed.
Remedies for the Borrower
- Negotiate with the Lender for a compromise or a more manageable rate.
- Seek judicial relief by contesting the interest in court and invoking the relevant laws and jurisprudence that guard against iniquitous interest rates.

In sum, while interest rates in the Philippines can be freely stipulated by the parties due to the suspension of usury ceilings, courts still maintain the authority to strike down or equitably reduce unconscionable rates. The Borrower should review the terms of the original agreement, determine whether the new stipulations were mutually consented to, and then evaluate whether the demanded monthly interest is so excessive as to be iniquitous. If these new demands did not stem from a valid meeting of the minds, the Borrower should not be bound to them. Alternatively, if the Borrower indeed consented, that consent might still be challenged on the ground that the interest rate is unconscionable, making recourse to the courts a viable option.

FULL LEGAL EXPOSITION

To provide a more detailed and structured overview, let us expand on all the relevant legal frameworks that might come into play:

The Law on Obligations and Contracts
- Article 1159: Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.
- Article 1305: 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. This underscores the principle that both parties must voluntarily agree to the terms.
- Article 1306: 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.
- Article 1308: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. This codifies the mutuality principle.
Interest Rates
- Article 1956 of the Civil Code states that no interest shall be due unless it has been expressly stipulated in writing.
- Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the same may be reduced by the courts if found unconscionable.
Case Law on Unconscionable Interest
- The Supreme Court has consistently used the doctrine that interest rates freely agreed upon by the parties may nevertheless be declared void for being excessive, iniquitous, unconscionable, or exorbitant. In Spouses Bautista v. Pilar Development Corporation (G.R. No. 178838, 08 May 2009), the Court ruled that it has the power to reduce such interest rates to legal interest rates when circumstances warrant.
- Another illustrative case is Chua v. Timan (G.R. No. 219165, 06 April 2021), wherein the Court reiterated that interest rates, though left to the will of the parties, cannot be so high as to be oppressive.
Relevant Bangko Sentral ng Pilipinas Circulars
- CB Circular No. 905 (s. 1982) effectively removed interest ceilings, but subsequent rulings have clarified that courts retain the power to reduce or nullify interest rates that are found to be exorbitant.
Principle of Equity
- Courts typically resort to equity to moderate iniquitous stipulations. Article 1229 of the Civil Code is often used as the basis for moderating penalties or interest rates that are shockingly disproportionate to the principal obligation.
Formalities in Loan Contracts
- Although oral loan contracts can be valid, those involving interest must be in writing (Article 1956 of the Civil Code). If the new interest arrangement is not documented, there may be issues of enforceability.
Novation
- If the Borrower and Lender had a valid original agreement and they now seek to change or renew the terms, the concept of novation under the Civil Code would require a clear intention to extinguish the old obligation and replace it with the new. If this intention is not clearly and expressly stated, the new arrangement might be legally questionable.
Potential Illegality or Fraud
- If the Lender is unilaterally imposing terms unbeknownst to or not freely accepted by the Borrower, such an imposition may be considered fraudulent or violative of the requirement of consent in contracts.

PRACTICAL APPLICATION AND ADVICE

Documentation
The Borrower should secure copies of any written agreements or evidence of payments made. This includes receipts, promissory notes, and informal or formal communications with the Lender concerning the original and subsequent arrangements.
Verification of Calculations
Before proceeding, the Borrower should calculate precisely how much has already been paid toward principal and interest, how much remains outstanding, and how the newly proposed monthly charges compare to the standard or typical rates.
Open Dialogue with the Lender
If feasible, the Borrower may try to negotiate with the Lender to restructure the payment scheme into something more reasonable, perhaps by extending the period or agreeing on a more standard interest rate (e.g., 1% to 2% per month, which some Philippine courts have tolerated as within the bounds of reason, though that can still be high).
Seeking Legal Counsel
Retaining a lawyer allows the Borrower to properly assess potential causes of action and defenses. The lawyer can issue a demand letter to the Lender pointing out that the interest is excessive, or that the new arrangement has no binding effect absent the Borrower’s free and informed consent.
Potential Litigation
- If an amicable resolution is not possible, the Borrower might seek judicial intervention. The Borrower can file a complaint for the annulment or reformation of the iniquitous stipulation in the loan agreement.
- If the Lender files a case against the Borrower for collection of sum of money, the Borrower can raise as a defense that the interest rate is unconscionable, thereby invoking the courts’ power to reduce interest rates.
Risks Involved
Litigation can be time-consuming and costly. A weighed approach might be to first attempt settlement. If settlement fails, the Borrower can resort to a formal legal process.
Obligation to Pay a Reasonable Interest
- Even if the Lender’s interest demands are struck down by a court, the Borrower should expect to pay at least the principal plus a reduced or moderate interest as determined by the court. It is extremely rare for courts to completely eliminate the obligation to pay any form of interest when the parties have clearly intended an interest-bearing loan.

FREQUENTLY ASKED QUESTIONS

Is there a “legal interest rate” in the Philippines if no rate is stipulated by the parties?
- Yes. If no rate is agreed upon, or if a stipulated rate is voided, the prevailing legal interest rate—currently 6% per annum—will apply.
Does the concept of usury still exist in Philippine law?
- Usury, in the sense of imposing a criminal penalty for interest in excess of a legal limit, has been effectively decriminalized due to the suspension of the Usury Law’s ceilings. However, the courts still have the power to declare an interest rate unconscionable and reduce it accordingly.
Can the Lender impose new terms after the original loan agreement has been in effect for a while?
- Generally, the Lender cannot unilaterally alter the terms of a valid contract without the Borrower’s consent. Any modification requires a meeting of the minds (mutual agreement).
What happens if the Borrower has partially complied with the new terms out of fear or lack of understanding?
- This may still be contested if the Borrower can show a lack of real consent, or that the interest rates are unconscionable. Partial compliance does not necessarily validate an oppressive stipulation, though it could complicate the Borrower’s arguments.
Is the Borrower obligated to continue paying the newly imposed interest if there is no clear new contract?
- In principle, no. But if the Borrower pays, that might later be deemed acquiescence to the new terms. Therefore, the Borrower should formally express objections or clarifications if the Borrower believes the new interest is not in accordance with the original agreement or is unconscionable.

FINAL OBSERVATIONS

The scenario poses a classic issue in Philippine loan transactions where an initial high interest arrangement evolves into an even more burdensome scheme. The key takeaways are:

Freedom to Stipulate Interest – Yes, but subject to the test of unconscionability.
Mutual Consent – Any modification to the original contract must be mutually agreed upon.
Court Intervention – Courts can and do intervene to strike down or reduce interest rates deemed unconscionable or iniquitous.
Strategic Approach – The Borrower may attempt negotiation first, and if that fails, seek legal remedy.

To directly address the Borrower’s question, “Tama po ba iyon?” or “Is that correct?”: If the Lender demands further monthly payments characterized by a monthly interest rate that might approach or exceed 6% of the principal, it could be considered unconscionable based on jurisprudence. Furthermore, if this was never part of the original stipulation and the Borrower was not given the opportunity to agree or disagree freely, the Borrower may challenge the validity of this arrangement. Ultimately, while the Borrower cannot ignore the obligation to repay the principal plus a reasonable interest, the Borrower may seek a court’s intervention to ensure that the interest rate is moderated in compliance with the principles of fairness and justice.

This article provides a broad overview of the legal foundations governing loan arrangements in the Philippines. For specific applications of these principles or to address unique factual nuances, it is imperative to consult a qualified attorney. The discussion here is not intended as formal legal advice but as a general legal reference for those who find themselves navigating questions of interest rates and unconscionable loan terms.