Is an agreement to pay an interest of rate 6% per month on a loan, valid and enforceable?
This is the case of the spouses Letty and Raffy. In November 2015, they obtained a loan of PhP50,000.00 from Veronica and signed a promissory note agreeing to a 6% monthly interest rate, payable within one year. The spouses failed to pay the loan including the interest upon maturity. Veronica thereafter filed a case for collection of sum of money against the spouses, using as evidence, the signed promissory note.
In their defense, the spouses cited that the interest rate charged against them was usurious and therefore, not enforceable.
Who is correct?
Act No. 2655 was the Philippine Usury law, prohibiting lenders from charging borrowers excessively high rates on interest loans.
However, this law was rendered legally inexistent with the passage of Central Bank Circular No. 905 on December 22, 1982, expressly removing the interest ceilings prescribed by the Usury Law.
In addition, this law is deemed unconstitutional for violating Article III, Section 1, Clause 10 of the Philippine Constitution which states that “No law impairing the obligation of contracts shall be passed.”
Interest can now be charged as the lender and borrower may agree upon. There is nothing illegal nor criminal in charging excessive interest rates on loans.
However, in several Supreme Court decisions, the high court, in dealing with the validity of interest agreed by the parties, has ruled that interest rates which are “excessive, iniquitous, unconscionable and exorbitant” may be invalidated for being contrary to morals.
What is considered as excessive, iniquitous, unconscionable and exorbitant that is contrary to morals, depends on the circumstances of each case. There is no hard and fast rule in determining a reasonable interest rate.
In fact, in certain cases, the Supreme Court sustained interest of up to 24% per annum.
Where the court invalidates an interest rate for being “excessive, iniquitous, unconscionable and exorbitant”, the Court may (and usually does) apply the provision of either Circular No. 799 of the Philippine Monetary Board, imposing a legal interest rate of 6% per annum for loans or forebearance of money, goods or credits or Article 2209 of the Civil Code of the Philippines, also imposing a 6% per annum interest rate.
In the case of Letty and Raffy, an interest rate of 6% per month, or 72% per annum, may be invalidated by the court for being contrary to morals. They are still liable to pay Veronica the principal amount that they owed. The court, using its sound discretion and judgment, may impose a lower interest rate, or apply the legal interest rate of 6% per annum until fully paid.
