Published 5 August 2019, The Daily Tribune

It has been said that compound interest is the eighth wonder of the world, such that “he who understands it, earns it. He who doesn’t, pays it.” Better to understand it then, to avoid being at the losing end of such transactions.

Interest is the cost of borrowing money. It is rather expected in almost all loan and credit transactions; but how much is really due when there is no agreement on the rate, or when the agreed rate is so high as to drive the debtor to penury, is a point worthy of discussion.

Interests are generally a matter of agreement and therefore the parties are free to stipulate the terms thereof. Under our Civil Code, a contract is the law between the parties and they are expected to comply with it in good faith. Article 1306 of the Civil Code further provides that contracting parties 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.

If a loan is extended and the debtor fails to repay the same, the interest due is what has been stipulated upon by the parties. Pursuant to Article 1856 of the Civil Code, the agreed interest must have been expressly stipulated in writing. This interest is called moratory interest or interest for the use of the money.

Previously, we were governed by the Usury Law which capped the  interest that can be imposed upon a loan. On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the Central Bank – Monetary Board, the country’s central policy body for matters concerning money, banking and credit, the authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are effected gradually and announced in advance.

In the exercise of the authority granted to it, the Monetary Board issued CB Circular No. 905, Series of 1982, which removed the ceilings on interest rates on loans or forbearance of any money, goods or credits by declaring that such rates are no longer subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

Under the current rules, therefore, the debtor and creditor may enter into a contract providing for any amount of interest.

In Philippine National Bank v. Court of Appeals (238 SCRA 20), it was held that P.D. No. 1684 and C.B. Circular No. 905 allowed the contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In other words, they can agree to adjust, to increase or to decrease, the interest previously stipulated. CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity.

Hence, the general rule is that the rate of interest as agreed upon by the parties freely shall govern the transaction. It is not for our courts to change the stipulations in the contract where it is not illegal.

But although there is no longer any cap on interest rates that the parties may stipulate on, excessive, iniquitous, unconscionable and exorbitant interest rates are still not allowed, for these are deemed contrary to morals and public policy, if not against law. Unconscionable interest rates are those which will either enslave their borrowers or lead to a hemorrhaging of their assets. In the next article, we will cite relevant jurisprudence where the Supreme Court nullified stipulated interest rate on loans for being be unconscionable and shocking to the ordinary conscience.

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