Letter to Attorney

Dear Attorney,

I hope this letter finds you well. I am writing to seek legal advice on a matter that has recently come to my attention. Specifically, I have encountered a situation involving an interest rate of 25% per month on a loan, and I am concerned about its legality under Philippine law.

Could you please provide guidance on whether this rate is lawful? If it is not, I would appreciate an explanation of the applicable laws, any potential remedies available, and the steps one might take to address this issue. Furthermore, I am curious about whether there are exceptions to the rule, such as when parties voluntarily agree to such terms.

Thank you for your time and expertise on this matter. I look forward to your response.

Sincerely,
A Concerned Borrower

The Legal Status of a 25% Monthly Interest Rate Under Philippine Law

In the Philippines, usurious interest rates are heavily regulated by law to protect borrowers from abusive lending practices. A monthly interest rate of 25% raises significant legal and ethical concerns. To determine whether such a rate is lawful, we must analyze the relevant laws, jurisprudence, and exceptions, as well as potential remedies available to borrowers who have been subjected to such practices.

1. Key Legal Framework

The legality of interest rates in the Philippines is primarily governed by Act No. 2655, as amended by Presidential Decree No. 116 (commonly referred to as the Usury Law). However, it is essential to note that the Usury Law's ceiling on interest rates was effectively suspended in 1983 through Central Bank Circular No. 905.

Under this circular, the imposition of interest rates is generally left to the agreement of the parties. Nevertheless, this freedom to contract is not absolute. Excessive interest rates can still be deemed unconscionable, iniquitous, or contrary to morals, good customs, and public policy, rendering them invalid under the Civil Code of the Philippines.

2. Civil Code Provisions on Interest

The Civil Code of the Philippines provides critical safeguards against exploitative interest rates:

Article 1306: Allows parties to establish terms and conditions of a contract, provided these are not contrary to law, morals, good customs, public order, or public policy.
Article 1229: Grants courts the authority to reduce a penalty, including interest, if it is iniquitous or unconscionable.
Article 19, 20, and 21: Establish a general framework for the abuse of rights, including the imposition of exploitative interest rates.

3. Jurisprudence on Usurious Interest

Philippine jurisprudence provides extensive guidance on the enforceability of high interest rates:

Medel v. Court of Appeals (1998): The Supreme Court declared an interest rate of 5.5% per month (66% per annum) as unconscionable and reduced it to 12% per annum.
Ruiz v. Court of Appeals (2001): The Court reiterated that interest rates must not be exorbitant and reduced an excessive rate to a more reasonable level.
Macalinao v. Bank of the Philippine Islands (2013): The Court emphasized that the principle of equity allows courts to intervene and nullify or adjust unconscionable interest rates.

In these cases, the courts have consistently voided or reduced interest rates that are deemed iniquitous, even in the absence of a usury law ceiling.

4. Regulations on Lending Companies and Online Lenders

To curb predatory lending practices, the Securities and Exchange Commission (SEC) has implemented stringent rules under the Lending Company Regulation Act of 2007 (Republic Act No. 9474) and related laws. Lending companies are prohibited from imposing excessive interest rates, and the SEC has the authority to investigate and sanction violators.

The Online Lending Guidelines issued by the SEC in 2020 specifically target abusive practices by online lenders. The guidelines mandate fair treatment of borrowers and emphasize that interest rates must be reasonable and justifiable.

5. Analysis of a 25% Monthly Interest Rate

A monthly interest rate of 25% translates to an annual effective rate exceeding 300%, which is highly likely to be deemed excessive and unconscionable under Philippine law. Such a rate is substantially higher than typical market rates for personal or consumer loans, even in high-risk lending scenarios. Courts would likely consider this rate as violating public policy and the principles of equity.

Even if the borrower voluntarily agreed to this rate, the law permits intervention to prevent unjust enrichment and protect public interest.

6. Borrower Remedies

If subjected to an excessive interest rate, a borrower may pursue the following remedies:

Judicial Nullification or Reduction of Interest: The borrower can file a case in court to have the interest rate declared void or reduced to a reasonable level.
Filing a Complaint with the SEC: Borrowers dealing with lending companies can report excessive rates to the SEC for administrative action.
Recovery of Overpayments: Under Article 1412 of the Civil Code, a borrower who has paid excessive interest may recover the excess amount.
Alternative Dispute Resolution: Borrowers and lenders may opt for mediation or arbitration to resolve disputes amicably.

7. Conclusion and Recommendations

A 25% monthly interest rate is almost certainly illegal under Philippine law due to its unconscionable nature. Borrowers subjected to such rates have robust legal remedies, ranging from judicial relief to regulatory enforcement.

To avoid future disputes, borrowers should carefully review loan agreements and consult with legal counsel before signing. Lenders, on the other hand, must ensure compliance with ethical and legal standards to avoid sanctions and reputational harm.

By fostering a balanced approach to lending, the Philippine legal system aims to protect the rights of both borrowers and lenders while promoting fair and equitable financial transactions.