In the Philippines, the law protects borrowers from exorbitant interest rates and excessive penalties that can lead to financial ruin. While lenders and borrowers can agree on loan terms, these must still be fair and reasonable. If your debt has grown uncontrollably due to high interest and penalties, you may have legal grounds to challenge it.

What the Law Says:

Contracts must not be contrary to law, morals, good customs, public order, or public policy. If they are, they are considered void under Article 1409 of the Civil Code. While the Usury Law’s interest rate ceilings have been removed, courts can still strike down excessive interest rates that unfairly burden borrowers. A 3% monthly interest (or 36% per year) has been declared invalid by the courts.

Some contracts impose additional penalties for late payments, but if these are too harsh, the courts can moderate or remove them. A penalty of 1/10 of 1% per day plus 1.5% per month (42% per year) has been ruled invalid by the courts.

In Manila Credit Corporation v. Viroomal (2023), the Supreme Court declared a 36% annual interest rate with penalties as excessive and reduced it to the legal rate of 12% per year. Borrowers in similar situations may have the right to recover overpayments.

What Can You Do?

If your loan balance has skyrocketed due to unfair interest rates and penalties, you may have legal remedies. The courts can reduce excessive charges, invalidate unjust loan terms, and even allow borrowers to recover excess payments made. Interest rates should not “enslave borrowers or hemorrhage their assets.”

If you’re facing financial distress due to a burdensome loan, consult legal help.