Dec 22, 20232 min read

SC Nullifies Exorbitant, Unconscionable Loan Interest Rate

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SC Nullifies Exorbitant, Unconscionable Loan Interest Rate |

While the parties to a loan agreement may depart from the legal interest rate, any deviation therefrom must be reasonable and fair.

This was the ruling of the Supreme Court’s Second Division, through Associate Justice Mario V. Lopez, denying the petition for review on certiorari filed by Manila Credit Corporation (MCC). The petition challenged the rulings of the Court of Appeals (CA) which had affirmed the judgment of the Regional Trial Court (RTC) declaring the interest rates imposed by MCC on Ramon S. Viroomal (Ramon) and Anita S. Viroomal (collectively, Spouses Viroomal) void for being patently exorbitant and unconscionable.

In resolving MCC’s petition, the Court stressed that while parties to a contract are free to agree on stipulations, clauses, terms, and conditions as they may deem convenient, these must not be contrary to law, morals, good customs, public order, or public policy.

Further, under Article 1409 of the Civil Code, such contracts contrary to morals are inexistent and void from the beginning.

In loan agreements, in particular, while the contracting parties may depart from the legal interest rate, any deviation therefrom must be reasonable and fair. “If the stipulated interest for a loan is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is justified under the prevailing market conditions,” held the Court.

The Court added that while Central Bank of the Philippines Circular No. 905-82 has effectively removed the interest ceilings prescribed under the Usury Law, lenders may not impose interest rates that would “enslave borrowers or hemorrhage their assets.”

Reiterating its 2021 ruling in Megalopolis Properties, Inc. v. D’Nhew Lending Corporation, the Court held that while there is no “numerical limit on conscionability, the rate of 3% per month or 36% per annum is three times more than the 12% legal interest rate, and therefore excessive and unconscionable.”

The Court added that the “willingness of the debtor in assuming an unconscionable rate of interest is inconsequential to its validity.”

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