Interest on a loan or forbearance of money is governed by several principles. First, no interest is due unless it has been expressly stipulated in writing; a lender cannot collect interest that was not agreed to in writing, though the law provides for legal interest as damages in certain cases. Second, while the Usury Law once fixed maximum interest rates, its ceilings have been suspended (effectively lifted) by administrative action, so parties are generally free to stipulate the interest rate. However, this freedom is not unlimited: courts have consistently held that interest rates that are excessive, iniquitous, unconscionable, or exorbitant are contrary to morals and may be struck down or reduced by the court to a reasonable level (for example, very high monthly interest rates on informal loans have been reduced). When a stipulated rate is voided for being unconscionable, the courts typically impose the prevailing legal interest rate instead. Legal interest also applies as a form of damages: in the absence of a stipulation, a sum of money that is due earns legal interest from the time of judicial or extrajudicial demand, at the rate set by the monetary authority (which has changed over time). So while parties may agree on interest, the courts guard against unconscionable rates, and unwritten interest generally cannot be collected.
Interest Must Be in Writing
No interest is due unless expressly stipulated in writing. A lender cannot collect unwritten interest, though legal interest applies as damages in certain cases.
Usury Ceilings Suspended
The Usury Law ceilings have been suspended, so parties may generally stipulate the rate — but this freedom is not unlimited.
Unconscionable Interest Is Struck Down
Courts reduce or void interest that is excessive, iniquitous, unconscionable, or exorbitant, and impose the legal interest rate instead. Legal interest also runs on a due sum from the time of demand.
Practical Takeaways
- Interest must be written to be collectible;
- Rates are generally free (usury ceilings suspended), but unconscionable rates are struck down;
- Courts substitute the legal interest rate for voided rates.
Frequently Asked Questions
Can a lender charge interest that wasn't written down? Generally no. No interest is due unless it has been expressly stipulated in writing, though legal interest may apply as damages in certain cases.
Is there a legal ceiling on interest rates? The Usury Law ceilings have been suspended, so parties are generally free to stipulate the rate. However, courts can strike down or reduce rates that are excessive or unconscionable.
Can a court reduce a high interest rate? Yes. Interest rates that are excessive, iniquitous, unconscionable, or exorbitant are contrary to morals and may be reduced by the court to a reasonable level, typically the prevailing legal interest rate.
What interest applies if there is no stipulation? Legal interest applies as damages: a sum of money that is due earns legal interest from the time of judicial or extrajudicial demand, at the rate set by the monetary authority.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.