Unconscionable interest rates can be nullified or reduced

While the parties to a loan agreement may freely agree on the interest rate that applies to their transaction, any imposition of interest rate must always be reasonable and fair.

In fact, the Supreme Court ruled that even the willingness of the debtor to assume an exorbitant and unconscionable interest rate does not validate the agreed rate as legally binding and enforceable. This principle was clearly explained in the case of Spouses Castro v. Tan [GR 168940, Nov. 24, 2009], penned by Associate Justice Mariano del Castillo, which states:

“The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.”

Relative thereto, any loan agreement stipulating a grossly excessive interest rate is contrary to morals, and therefore void from the beginning, in consonance with Article 1409 of the New Civil Code of the Philippines.

Moreover, to prevent lenders from exploiting borrowers with oppressive rates of interest, the courts are granted the power to reduce unjust or unconscionable contractual interest rates, pursuant to Article 1229 of the said Code, which provides:

“Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”

With the foregoing, any debtor who enters into a loan agreement with an excessive interest rate may seek judicial relief to declare the interest void and unenforceable, or to reduce it to a fair and reasonable rate as warranted by the circumstances.

In this regard, one may, therefore, file a civil suit through the courts, either for the annulment of the interest rate in your loan agreement or the reformation of the instrument to fix the appropriate interest rate.

Source: Manila Times