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Dear PAO, My Uncle Ted is a retired member of the Armed Forces of the Philippines. He was lured by his fellow retiree to obtain a loan from a certain lending company. Considering that Uncle Ted has been undergoing medication for diabetes, and he really needed money that time, he went to the lending company and signed the documents needed to facilitate the processing of his loan. The borrowed amount was eventually released to him, and one of the conditions set by the creditor was for Uncle Ted to leave his ATM card with the company. Then, the latter will just withdraw the monthly payment and interest, whatever remains in the ATM shall be given to Uncle Ted. Uncle Ted is now complaining that the interest rate of 45 percent per month imposed by the creditor is too

high, thus, there is really nothing left from his pension. Please guide us on this matter. Brix

Dear Brix, The contracting parties, when it comes to entering into a contract of loan, may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy (Article 1306, New Civil Code of the Philippines).

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Thus, your Uncle Ted and the lending company may enter into a contract providing for any amount of interest they like. However, if such interest rate is excessive, unreasonable or exorbitant which could result in the enslavement of the debtor, such interest rate may be nullified. In the case of Spouses Castro vs Tan et al. (G.R. No. 168940, November 24, 2009), the Honorable Supreme Court Associate Justice Mariano C. Del Castillo said that:

“While we agree with petitioners that parties to a

loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January

1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

“In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v Court of Appeals, we annulled a stipulated 5.5 percent per month or 66 percent per annum interest on a P500,000 loan and a 6 percent per month or 72 percent per annum interest on a P60,000 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v Court of Appeals, we declared a 3 percent monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12

percent per annum”.

It is very clear that the interest rate of 45 percent imposed by the lending company is excessive considering that no amount is already left in

your uncle’s pension every time that he pays the amortization and interest. Such interest rate stipulated may be declared by the court as not agreed upon.

Again, we find it necessary to mention that this opinion is solely based on the facts you have narrated and our appreciation of the same. The opinion may vary when the facts are changed or elaborated.