Supreme Court: Interest on loans must not be excessive.

Supreme Court: Interest on loans must not be excessive.

 

(c) ParSU-APSS

The contracting parties, when it comes to entering into a contract of loan, 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 1306, New Civil Code of the Philippines) (Acosta)

 NB: also known as the Principle of Autonomy of Will

Article 1961 of the New Civil Code provides “Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code.”

 

What is Usury Law? Act No. 2655 (Usury Law was enacted on February 24, 1916. It was passed to curb usurious interest, because excessive interest for loan for money is abhorrence form the earliest time. (U.S vs. Constantino, 39 Phil. 552) cited by Pineda, 2006

 

Usury Law “legally inexistent”?

Usury Law has been rendered “legally inexistent” by CB Circular No. 905 series of 1982 effective on January 1, 1983 by abolishing ceiling on interest.

Power of the Central Bank?

Under P.D No. 1684, “Central bank was empowered to prescribe the maximum rates of interest for loans and certain forbearances.”

 

Thus, a person and lending company may enter into a contract providing for any amount of interest they like. However, if such interest rate is excessive, unreasonable or exorbitant which could result in the enslavement of the debtor, such interest rate may be nullified. In the case of Spouses Castro vs Tan et al. (G.R. No. 168940, November 24, 2009), the Honorable Supreme Court Associate Justice Mariano C. Del Castillo said that:

 

“While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

 

“In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v Court of Appeals, we annulled a stipulated 5.5 percent per month or 66 percent per annum interest on a P500,000 loan and a 6 percent per month or 72 percent per annum interest on a P60,000 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v Court of Appeals, we declared a 3 percent monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12 percent per annum”.

 

 

Source:

Ernesto L. Pineda (2006). Credit Transactions and Quasi Contracts. Central Book Supply, Inc. page. 48 – 50.

Persida Acosta (2017). Interest on loans must not be excessive. Manilatimes.

Retrieved June 7, 2020, from https://www.manilatimes.net/2017/02/11/legal-advice/dearpao/interest-loans-must-not-excessive/311734/