In one of Fr. Jerry M. Orbos, SVD’s books — Just a Moment — he asks a powerful question: “Was there a moment in your life when you experienced God in a very real and personal way?” My answer is a wholehearted yes — not just once, but many times. I didn’t grow up religious. I wasn’t taught to rely on God’s grace. As a child, life felt messy, hopeless, and out of control. I wanted to grow up fast so I could fix the things I hated most — especially the way we were living. Back then I didn’t know it, but God was already working behind the scenes. The first time I truly felt His presence was in 2008, when I passed the bar exam. That year, the passing rate was unexpectedly adjusted — something I saw as God’s perfect timing. Honestly, if that didn’t happen, I don’t know how I would have survived it. It was a turning point that made me believe God sees us, hears our whispered prayers, and knows how much we struggle. From that day, I promised myself to live ri...
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Just this morning, I received a phone inquiry from a friend from way back in elementary school seeking legal advice about a loan agreement. She was apprehensive about the legal consequences of non-payment of interest and felt overwhelmed by the mounting penalties. Sickly and eager for peace of mind, she wanted to settle the matter amicably but sought guidance on how to proceed. Her concern led me to revisit the intricacies of the law on interest and penalties in loan agreements, an area often misunderstood by both creditors and debtors.
The Requirement of a Written Agreement
In the Philippines, the imposition of interest and penalties on loans must be made in writing. Article 1956 of the Civil Code of the Philippines explicitly provides:
"No interest shall be due unless it has been expressly stipulated in writing." This means that verbal agreements to impose interest, no matter how strongly claimed by a creditor, cannot be enforced unless reduced to a written document signed by the parties involved. Creditors must ensure that their agreements are documented clearly, while debtors should keep a copy of the agreement for their records.
When Is Interest Considered Excessive or Exorbitant?The law recognizes that while interest may be imposed on loans, it should not be unconscionable or oppressive. The Supreme Court, in various cases, has ruled that exorbitant interest rates are void for being contrary to public policy. For instance:
Medel v. Court of Appeals (G.R. No. 131622, November 27, 1998)- The Court invalidated an interest rate of 66% per annum (5.5% per month), calling it excessive, iniquitous, and unconscionable.
Spouses Solangon vs. Salazar (G.R. No. 125944, 29 June 2001)- The Court struck down a 6% monthly interest rate (72% per annum) for being excessive, iniquitous, unconscionable and exorbitant.
Chua v. Timan (G.R. No. 170452, August 13, 2008)- The Court declared the stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum
Under Bangko Sentral ng Pilipinas Circular No. 799 series of 2013, the legal interest rate for loans or forbearance of money is pegged at 6% per annum unless otherwise agreed upon in writing. Any rate substantially exceeding this figure may be subjected to judicial scrutiny for fairness.
If a debtor has already paid excessive or usurious interest, the law provides relief. Article 1413 of the Civil Code states:
"Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment."
In cases where courts find the interest unconscionable, they may reduce it to a reasonable rate and order the excess to be refunded to the debtor.
It always best to read the contract and comply with the terms and conditions agreed upon to avoid litigation. Even if the case is purely civil in nature, litigation can be financially and emotionally taxing for both parties. It involves:
- Costly legal fees: Filing fees, attorney’s fees, and other court expenses.
- Time-consuming proceedings: Cases can drag on for months or even years.
- Strain on relationships: Disputes can damage personal or professional ties.
Practical Advice for Creditors and Debtors
For creditors, it’s essential to ensure compliance with legal standards:
- Document all agreements in writing, specifying the agreed-upon interest rates and penalties.
- Avoid imposing excessive interest to prevent nullification of the terms or possible legal repercussions.
- Be empathetic and consider the debtor's financial capacity to pay, as excessive penalties may be deemed oppressive.
- Always demand a written agreement and read it carefully before signing.
- Understand the provisions, particularly those concerning interest and penalties.
- Keep proof of the loan agreement, payment receipts, and other related documents.
- If facing financial difficulty, communicate openly with the creditor to negotiate more manageable terms.
In case the matter is brought before the court, maintaining accurate and complete documentation will help substantiate your claims or defenses.
Thus, both creditors and debtors are encouraged to resolve disputes amicably whenever possible.
By the end of my conversation with my friend, she felt more at ease knowing her rights and the legal remedies available to her. Glad that I accepted the call, I was able to guide her toward a resolution and help her avoid unnecessary stress and expense.
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Disclaimer:
This article is for informational purposes only and does not constitute legal advice. For specific legal concerns, consult a licensed attorney.
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