Dear Attorney,

I am seeking your advice regarding a financial issue. I borrowed ₱30,000 from someone, and we agreed that I would pay an interest of ₱1,000 weekly. However, there was no formal written agreement, only a verbal understanding between us. I want to know the legality of this arrangement, specifically:

Is this verbal agreement enforceable under Philippine law?
What are my legal rights and obligations in this situation?
Can the lender legally charge such interest without documentation?
What remedies do I have if I find the terms excessive or abusive?

Thank you for your guidance. I look forward to your advice on this matter.

Sincerely,
A Concerned Borrower

Legal Insights on Verbal Lending Agreements and Usurious Interest Rates in the Philippines

Overview of the Issue

Informal lending arrangements without written agreements are common in the Philippines. While verbal agreements are generally enforceable under Philippine law, the absence of formal documentation introduces complexities in proving the terms and conditions. Moreover, excessive interest rates raise potential legal concerns under the laws governing loans, particularly in the context of usury, unjust enrichment, and the ethical treatment of borrowers.

This article discusses the enforceability of verbal agreements, the legality of high-interest rates, and the remedies available to borrowers under Philippine law.

1. Enforceability of Verbal Loan Agreements

Under the Philippine Civil Code, verbal agreements are valid and binding provided they meet the essential requisites of a contract, which include:

Consent: Both parties must voluntarily agree to the terms of the loan.
Object: The object of the contract must be the delivery of a sum of money or goods.
Cause: The cause is the lender's intent to provide a loan, and the borrower’s obligation to repay with or without interest.

The absence of a written agreement does not invalidate the loan; however, proving its terms becomes challenging in case of a dispute. Article 1356 of the Civil Code states that contracts may be in any form, except when the law requires a specific form for validity. Since no written form is required for loans, verbal agreements remain valid.

Burden of Proof: If the lender seeks enforcement, they must present evidence of the loan. Common forms of evidence include:

Witness testimony;
Text messages or other communications acknowledging the loan;
Proof of transfer of the loan amount, such as bank records or cash delivery acknowledgments.

2. Legality of Charging High Interest Rates

Legal Basis for Interest Rates: Philippine law recognizes the right of parties to stipulate interest rates, but this is subject to regulation. Excessive interest rates may be considered usurious or unconscionable under the following provisions:

Usury Law (Act No. 2655): Although this law was amended to lift caps on interest rates (Central Bank Circular No. 905), the courts may still intervene if the interest is excessive.
Article 1229, Civil Code: Courts can reduce unconscionable penalties or interest rates.
Batas Pambansa Blg. 22 and RA 3765: Govern transparency in loan terms to protect borrowers.

Excessive Interest Defined: The Supreme Court has repeatedly ruled that exorbitant interest rates, such as 5% per month or more, may be deemed contrary to public morals and void. In Medel v. Court of Appeals (G.R. No. 131622, 1998), an interest rate of 5.5% per month was declared iniquitous and reduced.

In your case, a weekly interest of ₱1,000 on a ₱30,000 loan equates to an annual interest rate exceeding 170%. This is potentially usurious and may be challenged in court as unconscionable.

3. Legal Rights and Obligations of the Borrower

As a borrower, you have the obligation to repay the principal loan amount, along with any lawful interest that may have been agreed upon. However, you also have the following rights:

Right to Fair Terms: Under the Civil Code and related laws, borrowers are entitled to just and equitable loan terms. Unreasonable interest rates may be reduced by the courts.
Right to Contest Unjust Interest: You can invoke Article 1306 of the Civil Code to challenge conditions that are contrary to law, morals, good customs, or public policy.
Protection Against Intimidation: The lender cannot harass or intimidate you into repayment. Any such actions may constitute violations of criminal laws on coercion.

4. Remedies for Excessive or Abusive Terms

If you find the terms of the loan abusive, you can seek redress through the following means:

a. Renegotiation with the Lender

Attempt an amicable settlement to reduce the interest rate to a reasonable amount. Open dialogue may lead to a mutually acceptable compromise.

b. Legal Action for Reduction of Interest

File a civil action in court to reduce or nullify excessive interest. This is supported by:

Article 1229 of the Civil Code, allowing courts to moderate iniquitous stipulations.
Eastern Shipping Lines v. Court of Appeals (G.R. No. 97412, 1994), which upheld the judicial authority to reduce unconscionable interest.

c. Defense in Case of Enforcement

If the lender sues you for unpaid interest, you can argue the illegality of the agreed terms as a defense. The absence of a written agreement further complicates the lender’s ability to prove their claim.

d. Criminal Complaint (if applicable)

If the lender engages in harassment, threats, or violence, you may file criminal complaints under:

Article 287 of the Revised Penal Code (Grave Coercion);
RA 9262 (Anti-Violence Against Women and Their Children Act), if the borrower is a woman and subject to economic abuse.

5. Small Claims Procedure

If the lender files a collection case under the Small Claims Rules, take note:

The absence of a written contract does not prevent a small claims suit but weakens the lender’s position.
Small claims courts do not allow lawyers to represent parties, streamlining the process.

Prepare evidence of payments or communications to refute any claim for exorbitant interest or unpaid balances.

6. Relevant Case Law and Jurisprudence

Several Supreme Court cases offer guidance:

Sps. Solangon v. Salazar (G.R. No. 158358, 2004): The Court reduced an interest rate of 5% per month as excessive.
Garcia v. Villar (G.R. No. 132344, 1999): Highlighted that unconscionable interest rates are void for being contrary to public policy.
Almeda v. Court of Appeals (G.R. No. 170466, 2006): Reaffirmed that agreements must respect fairness and equity.

Conclusion

In summary, while the loan agreement in question is enforceable, the stipulated interest rate appears excessive and may not withstand judicial scrutiny. You have strong grounds to challenge or renegotiate the terms based on principles of equity and public policy. To ensure the best outcome, consult a lawyer to explore your options and prepare for potential legal proceedings.