Dear Attorney,

I hope this letter finds you well. I am writing to seek your legal guidance on a financial matter concerning the computation and legality of interest rates applied to a loan. The situation is as follows:

We borrowed ₱100,000 with an agreement to pay an interest rate of 6%. Based on our understanding, this means the total interest should be 6% of ₱100,000, which amounts to ₱6,000. However, the lender claims that the total amount owed is ₱160,000, which implies a significant disparity from the stated 6% interest rate. If we calculate based on this total, it suggests an effective interest rate of 60%. The payment schedule divides this amount into ten monthly installments.

We are concerned about whether this arrangement is legally compliant, as the effective interest rate appears disproportionately high. Kindly advise on the legality of this transaction, particularly in light of Philippine laws governing loans and interest rates, and guide us on any recourse available if this agreement is found to be invalid.

Thank you for your time and assistance.

Sincerely,
A Concerned Borrower

Understanding Loan Interest Rates and Legal Implications Under Philippine Law

Interest rates on loans in the Philippines are regulated under various laws, jurisprudence, and central bank circulars to ensure fairness and prevent usurious practices. To evaluate the legality of the situation presented, we must delve into several legal concepts, rules, and principles.

1. Applicable Laws and Regulations

The regulation of interest rates in the Philippines involves several key legal instruments:

Civil Code of the Philippines: The Civil Code (Article 1956) provides the foundational rule that no interest shall be due unless it has been expressly stipulated in writing.
Republic Act No. 3765 (Truth in Lending Act): This law requires lenders to disclose the full details of the loan, including the annual interest rate (AIR) and other charges, to borrowers to ensure transparency.
Bangko Sentral ng Pilipinas (BSP) Circular No. 799 and Subsequent Circulars: These circulars govern interest rates, providing guidance for reasonable lending practices while deregulating interest rates in general.
Anti-Usury Law (Act No. 2655): Although interest rate caps under the Anti-Usury Law have been lifted, the law still penalizes unconscionable or excessive interest rates under the principle of equity and public policy.

2. What Constitutes Legal Interest?

A stipulated interest rate of 6% is generally reasonable. However, the legality of the loan in question must be assessed by considering:

Nominal vs. Effective Interest Rate: The nominal interest rate is the stated rate (e.g., 6%). However, the effective interest rate accounts for compounding and additional charges, reflecting the true cost of the loan.
Disclosure Requirements: Under the Truth in Lending Act, the lender must clearly disclose how the interest is computed, including any additional fees or charges that affect the total amount payable.

3. Usurious Interest Rates and Unconscionability

While interest rate ceilings have been lifted, courts may still strike down agreements imposing unconscionable rates under the doctrine of equity. In Medel v. Court of Appeals (G.R. No. 131622), the Supreme Court declared a 66% annual interest rate as iniquitous and unconscionable, thus void for being contrary to public policy.

In the given scenario:

The purported effective interest rate of 60% significantly exceeds the nominal rate of 6%.
Courts may find this disparity unconscionable, especially if the borrower was misled or coerced into accepting the terms.

4. Legality of the Loan Agreement

To determine the legality of the loan, the following questions must be addressed:

Was the interest rate of 6% clearly stipulated in writing?
Did the lender provide full disclosure of how the ₱160,000 total was computed?
Are there hidden fees or penalties included in the loan that were not explicitly agreed upon?
Does the total payable amount reflect a rate grossly disproportionate to the stated 6% interest rate?

If any of these elements are lacking or violated, the agreement may be challenged as invalid.

5. Remedies for Borrowers

If the loan agreement is found to be unconscionable or in violation of the law, borrowers have several remedies:

Negotiation and Settlement: Borrowers may negotiate with the lender for a fair adjustment of the loan terms.
Filing a Complaint: A borrower can file a complaint with the Bangko Sentral ng Pilipinas or the Department of Trade and Industry for violations of lending regulations.
Judicial Recourse: The borrower may file a civil case to nullify the agreement or seek judicial intervention to reduce the interest to a reasonable level.

6. Practical Steps for Borrowers

To protect their interests, borrowers should:

Request a detailed breakdown of the loan computation from the lender.
Retain copies of all written agreements and communications with the lender.
Seek immediate legal assistance to review the agreement and identify any irregularities.

7. Conclusion

In the Philippines, while lenders and borrowers are free to agree on interest rates, these rates must not be excessive or unconscionable. Based on the details provided, the effective interest rate of 60% raises serious concerns about the validity of the loan agreement. Borrowers are encouraged to exercise their rights under the law and seek remedies against unfair lending practices.

Should you require further assistance or wish to pursue legal action, consulting with an attorney specializing in credit and lending laws is strongly recommended. A thorough examination of the loan documents will help establish the most appropriate course of action.