LETTER TO AN ATTORNEY

Dear Attorney,

I hope this letter finds you well. I am writing to seek your legal counsel regarding a personal loan situation that I am currently facing. About three months ago, I took out a loan of PHP 5,000. Unfortunately, I fell into financial difficulty and missed payments for three consecutive months. When I finally managed to gather funds to settle the obligation, I discovered that my total outstanding balance had soared to PHP 25,000—five times the original amount.

I contacted both the lending application’s customer service and their collection agency to propose a settlement where I would pay the remaining principal plus a reasonable amount of interest. However, they refused any negotiation or compromise. I understand that under Philippine law, there may be provisions or guidelines limiting unconscionable interest rates and unfair lending practices. Since I feel that this sudden ballooning of my debt is unjust, I would like to ask for your perspective on what steps I can take to protect my rights, negotiate a fair repayment, and, if necessary, seek recourse through legal or regulatory channels.

Thank you so much for your time and expertise. Your guidance on Philippine lending laws, relevant regulations, and potential remedies available to borrowers in my position would be of great help. I look forward to your advice regarding my next steps to address the excessive interest imposed by this lending platform.

Sincerely,

A Concerned Borrower

A LEGAL ARTICLE ON EXCESSIVE INTEREST AND UNFAIR DEBT COLLECTION PRACTICES IN THE PHILIPPINES

Introduction
The issue of excessive interest and unfair debt collection practices has become a pressing concern for many borrowers in the Philippines, particularly with the rise of digital lending applications. While access to instant loans and quick disbursal of funds provides convenience, borrowers sometimes find themselves facing skyrocketing balances—far exceeding their original principal—due to unscrupulous interest rates and unjust collection tactics. This comprehensive article explains the relevant laws, jurisprudential guidelines, and procedural remedies available under Philippine law for borrowers who wish to protect themselves from unfair debt collection and excessive loan charges.
Regulatory Framework and the Nature of Lending in the Philippines
Lending and financing companies in the Philippines are subject to various regulations aiming to ensure transparency, fairness, and accountability. The main regulatory bodies tasked with overseeing lending practices are the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP), and, in specific contexts, the local government units for business permit requirements.
- Bangko Sentral ng Pilipinas (BSP): The BSP regulates banks and quasi-banks, including some financing and lending companies that choose to align with BSP guidelines on interest rate caps or follow prudent lending practices.
- Securities and Exchange Commission (SEC): Registered lending companies are required to comply with the Lending Company Regulation Act of 2007 (Republic Act No. 9474) and its Implementing Rules and Regulations (IRR). They must obtain a valid Certificate of Authority to Operate from the SEC.
- Local Government and DTI: Lending platforms also require local permits, and certain consumer complaints can be raised with agencies such as the Department of Trade and Industry (DTI), depending on the nature of the complaint.
Applicable Laws and Statutes
Below are key Philippine laws and regulations that address lending practices, interest rates, and debt collection:

3.1 The Usury Law (Act No. 2655, as Amended)
Historically, the Philippines had a fixed cap on interest rates under the Usury Law. However, subsequent issuances effectively suspended the imposition of these interest ceilings, allowing parties to stipulate interest rates freely. Despite the suspension, courts in the Philippines have the power, under equitable principles, to declare stipulated interest rates as void for being unconscionable or iniquitous.

3.2 Central Bank Circulars
The Monetary Board has issued circulars (e.g., BSP Circular No. 799, later reaffirmed by BSP Circular No. 905) that removed statutory ceilings on interest rates. Nonetheless, interest rates must still not be “unconscionable” or run afoul of basic principles in the Civil Code.

3.3 Republic Act No. 3765 (Truth in Lending Act)
This law requires that lenders disclose to borrowers, prior to the consummation of a credit transaction, all relevant information such as finance charges, interest rates, fees, and other costs related to the loan. Failure to comply with disclosure requirements can result in administrative and civil liabilities for the lender.

3.4 Republic Act No. 9474 (Lending Company Regulation Act of 2007)
This law governs the establishment and operation of lending companies. It provides that lending companies must be duly registered with the SEC, maintain a required minimum paid-up capital, and abide by certain disclosure and operational rules. Violation of any provision can lead to fines and penalties, including revocation of the company’s authority to operate.

3.5 Civil Code Provisions
- Article 2209 of the Civil Code: Provides the legal interest rate in the absence of stipulation at six percent (6%) per annum.
- Article 1229: Allows courts to reduce a penalty if it is iniquitous or unconscionable. In a loan contract, the penalty or interest clause may be lowered if found to be excessive.
Concept of Unconscionable or Iniquitous Interest Rates
Despite the absence of a strict usury cap, the Supreme Court of the Philippines has consistently stepped in to invalidate interest rates or penalty charges deemed unconscionable. In some cases, the Court has reduced interest rates that were, for instance, 5% per month (or 60% per annum) or higher. The evaluation of unconscionability depends on several factors:
- The debtor’s ability to repay, given ordinary market conditions.
- The presence of compounding interest that causes the obligation to swell beyond any reasonable measure of risk.
- The nature of the debt (personal vs. commercial).
- Prevailing market interest rates, historically and currently.
  When the courts find that an interest rate is excessive, they may reduce it to a reasonable rate consistent with equity, often 12% or 6% per annum, depending on the timeline or existing jurisprudence.
Demand Letters and Collection Practices
After a borrower defaults or misses payments for a period of time, it is common for lenders or collection agencies to send demand letters. These letters typically outline the outstanding principal, accrued interest, penalties, and other fees. While demand letters are legal, certain practices are not permitted:
- Threatening arrest or criminal action for mere debt default. In the Philippines, non-payment of a debt is typically a civil matter, unless fraud or other criminal acts are involved.
- Harassing relatives, friends, or employers of the borrower.
- Spreading defamatory information or disclosing private data about the borrower’s finances to unauthorized individuals.
- Excessive or repeated phone calls and text messages beyond reasonable hours, especially if it amounts to harassment.
Penalties, Charges, and Ballooning Obligations
In many loan agreements, lenders impose late payment charges, collection fees, and other penalty provisions. Over time, if a borrower remains in default, these charges can accumulate significantly, leading to a ballooning obligation that far exceeds the original principal. Although such stipulations may be written in the contract or user agreement of a lending application, they remain subject to review by courts for fairness and reasonableness.

Key Considerations:
- Penalty vs. Interest: Some lenders compound interest upon interest, or impose both penalty charges and high interest simultaneously. Courts often look disfavorably on such “double” impositions if they lead to unjust enrichment.
- Clarity in Disclosure: Under the Truth in Lending Act, lenders must provide clear documentation explaining the rates. If the lender or lending app does not supply adequate disclosures, the borrower may have a legal basis to contest excessive or hidden charges.
- Possibility of Reduction: If charges and penalties appear unduly high, a borrower can seek judicial intervention to reduce them to a more equitable amount.
Rights and Remedies of Borrowers
Borrowers dealing with excessive interest or abusive collection practices have several avenues to explore:

7.1 Negotiation with the Lender or Agency
A borrower may attempt to negotiate directly with the lender or collection agency to arrive at a fair settlement, especially if the borrower can demonstrate willingness to settle the principal and a reasonable amount of interest. Sometimes, lenders are open to restructuring the loan, particularly if it improves their chances of recouping the principal.

7.2 Filing a Complaint with the SEC
If the lending entity is an SEC-registered lending or financing company, borrowers may file a formal complaint with the SEC Enforcement and Investor Protection Department (EIPD), especially when suspecting violations of R.A. 9474 or the rules on unfair collection practices. The SEC has the authority to investigate and, if warranted, impose penalties, suspensions, or revocations of the lender’s Certificate of Authority.

7.3 Filing a Civil Case
In situations where negotiations fail, and the borrower wishes to contest the legal validity of the imposed interest rates or penalties, a civil suit may be filed in the courts. The borrower can ask for the reduction of interest rates and penalty charges on grounds of unconscionability. While litigation can be time-consuming and costly, it may be warranted if the amount in dispute is significant or if the lender continues to engage in abusive collection.

7.4 Small Claims Court
The Philippine Supreme Court introduced the Revised Rules of Procedure for Small Claims Cases, which allows litigants to pursue simpler, faster, and more affordable resolution of money claims not exceeding a certain threshold (currently PHP 400,000). If the total amount in dispute meets the threshold, a borrower or lender can file a claim in small claims court without needing a lawyer, though legal advice is always beneficial.
Debt Collection Harassment and the Right to Privacy
Some borrowers endure repeated phone calls, abusive language, intimidation, or public shaming from collectors. The rise of lending apps that access a borrower’s contact list or other personal data has given rise to potential privacy violations. Under the Data Privacy Act of 2012 (Republic Act No. 10173), personal data must be collected and processed only for legitimate purposes and with the borrower’s consent. Lending companies or their agents risk administrative and criminal sanctions if found guilty of data privacy breaches.
Possible Criminal Liability for Lenders or Collectors
Debt collection becomes criminal if the collecting entity engages in:
- Grave threats or coercion (Articles 282 and 286 of the Revised Penal Code).
- Libel or slander (Articles 353 and 358 of the Revised Penal Code) if the collector publicly discloses defamatory statements.
- Unjust vexation (Article 287 of the Revised Penal Code) if the manner of debt collection goes beyond acceptable means and torments the borrower without lawful justification.
Borrowers who experience these tactics have the option to file criminal complaints with the Office of the Prosecutor if the conduct crosses the threshold into criminal territory.
Enforcement of Judgment
In the event a borrower files suit or if the lender initiates legal proceedings for collection, the enforcement of a court judgment must follow legal processes, which include service of summons, filing of pleadings, and a trial. If a court finds the lender’s interest rates or penalties excessive, the judgment may reduce them. If the lender prevails, the borrower may be required to pay the amount due. However, the creditor can only collect through lawful means—typically by garnishing wages or bank accounts, or by executing on property through a court sheriff following the issuance of a writ of execution.
Proposed Steps for Borrowers Facing Ballooning Obligations
Borrowers who have experienced a sudden spike in their loan amount should consider the following:
Review the Contract: Check all pertinent documents, including user agreements for the lending app, promissory notes, or any digital contract. Look for clauses relating to interest rates, penalties, and fees.
Compute Actual Charges: Itemize the principal, agreed interest, and any penalties. Ensure you understand how the lender has reached the total amount.
Request an Official Statement of Account: Ask the lending company or the collection agency for a detailed breakdown of your obligation.
Send a Formal Letter of Request or Proposal: Communicate your willingness to settle. Emphasize any undue or disproportionate charges and propose a payment plan that aligns with fair interest rates.
Keep a Record of Communications: Save emails, messages, call logs, or any evidence of harassment or refusal to provide a clear breakdown of charges.
Seek Legal Advice: If negotiations do not succeed or if you suspect the charges are unconscionable, consult a lawyer to explore the possibility of filing a complaint or defending against the collection.
Importance of Compliance for Lending Entities
From the perspective of lending companies, compliance with relevant regulations is paramount to avoid civil, administrative, and even criminal liabilities. Entities must ensure:

Proper Disclosure: Transparent interest rates, fees, and penalties.
Lawful Collection Tactics: Maintaining professional standards in dealing with overdue accounts.
License Requirements: Keeping an active Certificate of Authority with the SEC or ensuring compliance with BSP requirements if they operate as financing companies.
Data Privacy: Adhering strictly to the Data Privacy Act and ensuring borrowers’ information is not misused.

Negotiation and Amicable Settlement
In practice, most borrowers and lenders prefer to reach an amicable settlement. Litigation can be costly and time-consuming for both sides. Common settlement strategies include:

Partial Debt Condonation: The lender may agree to remove or reduce penalty charges.
Restructuring: Extending the payment period with a lower monthly amortization or interest rate.
Lump Sum Settlement: Paying a reduced amount in one go if the borrower can gather the funds.

Civil Law Remedies for Reduction of Unconscionable Interests
Under Article 1229 of the Civil Code, courts have the discretion to reduce an unconscionable penalty or interest to a reasonable rate. This approach is equitable, acknowledging that contracts should not be a vehicle for oppression or unjust enrichment.
Practical Considerations Before Filing a Case
Before deciding to go to court, borrowers should weigh the following:

Costs of Litigation: Attorney’s fees, filing fees, and incidental expenses may exceed the disputed amount.
Time Factor: Court proceedings may last months or years, depending on backlogs and complexity.
Negotiation Potential: Lenders often prefer to avoid protracted litigation. A well-presented case of unfair interest may prompt the lender to settle amicably.
Small Claims Suit: If the total claim is within the small claims threshold, this can drastically reduce time and costs, given that it’s a more streamlined process.

Collection Suits from the Lender’s Side
On the other hand, if a lender decides to file a civil collection suit, the borrower will be given the opportunity to defend against the claim. In doing so, the borrower may raise the defense of unconscionable or excessive interest rates. If proven, the court can reduce the interest to a reasonable level.
Potential Administrative Complaints
If the lender is an SEC-registered entity, the borrower can file a complaint with the SEC for violations of the Lending Company Regulation Act or other relevant rules. If the lending app or its collection agents have engaged in harassing behavior or violated data privacy, administrative sanctions could be imposed.
Legal Interest in the Event of Judicial Demand
If a case proceeds to court and the court awards a sum to the lender, legal interest is typically applied to the judgment amount from the date of judicial demand until full payment. The current legal interest rate, as set by the Supreme Court, is six percent (6%) per annum, unless otherwise stipulated or justified by contract.
Debt Relief Mechanisms in Extreme Cases
While there is no formal personal bankruptcy law in the Philippines akin to those in other jurisdictions, certain laws (like the Financial Rehabilitation and Insolvency Act, or FRIA) provide limited forms of relief for insolvent debtors. However, these are typically geared toward corporate debtors. Individuals with extreme financial difficulties may still rely on negotiation, possible condonation, or restructuring.
Special Considerations for Online Lending Applications
Digital lending apps have become widespread. Borrowers should be aware of:

Click-Wrap Agreements: The fine print in their terms of service, which might stipulate high interests or hidden charges.
App Permissions: Some apps require access to personal contacts or social media accounts. If used improperly for public shaming or unauthorized messaging, this could be a violation of data privacy laws.
Regulatory Status: Many of these apps might not be registered. Always check if the entity running the application is recognized by the SEC or the BSP.

Case Studies of Unconscionable Interest Rates
Philippine jurisprudence is replete with instances where the Supreme Court lowered interest rates from 60% per annum to 12% or 6%. Although the Court typically applies well-established norms to reduce unconscionable rates, each case is decided on its merits. The common thread is that interest or penalty provisions must never be so excessive that they become a tool for oppression.
Data Privacy Complaints and Remedies
Borrowers whose personal data was misused in the course of debt collection may file a complaint with the National Privacy Commission (NPC). Such complaints can result in administrative fines and penalties against the lender, especially if proven that the lender used contact information to harass or shame the borrower publicly.
Role of Legal Aid and Non-Governmental Organizations (NGOs)
For borrowers who do not have the means to hire private counsel, free legal aid is sometimes available through the Public Attorney’s Office (PAO) for qualified indigent clients, or through various NGOs and law school-based legal clinics. They can provide guidance and possibly assist in negotiation or mediation efforts.
Securing a Fair Settlement
The optimal resolution is often a settlement where the borrower pays the principal plus reasonable interest. Borrowers in a situation where a small loan ballooned to a huge sum should document all communications. A well-prepared defense or settlement pitch that references jurisprudence and statutory provisions on unconscionable interest rates can persuade the lender or collector to compromise.
Prescriptive Periods
Under Philippine law, actions to recover sums of money generally prescribe after a certain period (e.g., ten years for written contracts). Although it is not advisable to rely solely on prescription as a defense—because ignoring debt can lead to lawsuits—knowing the time frames helps borrowers understand their exposure to legal action.
Burden of Proof
In civil cases, the lender must prove the existence of the obligation, the borrower’s default, and the validity of the stipulated interest or penalties. Meanwhile, the borrower must present evidence of the unconscionable nature of the charges or show that the lender failed to comply with disclosure requirements.
Practical Tips for Borrowers in the Digital Age

Always Read the Terms: Even if in small print.
Check the Lender’s Registration: See if they are recognized by the SEC.
Exercise Caution with Permissions: Understand how your data may be accessed or used by the lending app.
Keep Transaction Records: Emails, text messages, screenshots, and digital payment receipts can be crucial pieces of evidence.
Prioritize Communication: Rather than ignoring calls, communicate your intentions to pay, if feasible, and propose alternatives.

Relevance of Good Faith and Moral Damages
If a borrower can demonstrate they acted in good faith, attempting to settle promptly once financially able, this can strengthen their position in negotiations or even in court. On the other hand, if the lender or its agents engage in malicious or oppressive behavior in collecting the debt, the borrower may potentially claim moral damages or even exemplary damages under certain circumstances.
Conclusion and Final Thoughts
The problem of a small loan ballooning into a significantly larger debt due to penalties, interest, and other charges is not uncommon. Philippine law provides remedies through jurisprudence on unconscionable rates, statutory protection under laws like the Lending Company Regulation Act, the Truth in Lending Act, and the Data Privacy Act, and regulatory oversight by the SEC and other agencies.

Borrowers confronted with seemingly insurmountable obligations are encouraged to remain proactive. Open lines of communication with the lender are essential; if negotiations break down, the borrower can turn to government agencies or the judiciary for redress. While Philippine law no longer imposes a hard cap on interest rates, courts consistently uphold principles of equity, justice, and fairness. Thus, charges that unjustly multiply a debt may be subject to reduction or invalidation.

For both lenders and borrowers, understanding the regulatory environment and the boundaries of lawful, ethical collection is key. With the right knowledge and approach, borrowers can defend themselves against excessive or unfair charges, while lenders who adhere to proper standards can protect their business interests without infringing on borrowers’ rights.

DISCLAIMER
This legal article is for informational purposes only and does not constitute formal legal advice. Laws, regulations, and rulings may be updated or interpreted differently depending on the facts and circumstances. For specific concerns about any legal matter, it is best to consult a qualified attorney who is well-versed in Philippine law. The author assumes no liability for any reliance on the information provided herein.