Abad: What is the status of a usurious rate of interest?

THE present controversy arose from a case for collection of money, filed by Alex A. Jaucian against Restituta Imperial, on October 26, 1989. The complaint alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans in the amount of P320,000.00 for which the former executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. Said promissory notes indicate the rate of interest at 16% per month. When the said loans became overdue and unpaid, especially when the defendant’s checks were dishonored, plaintiff made repeated oral and written demands for payment.

The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the defendant would exchange it with cash.

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Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her loans matured. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorney’s fees, was P2,807,784.20.

On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%) per month. The notes matured every four (4) months with unearned interest compounding every four (4) months if the loan was not fully paid.

The defendant claims that as of January 25, 1989, she has made payments to plaintiff in the amount of P441,780.00; or, an excess of P121,780.00 over the original loan of P320,000.00.

Defendant contends that from all perspectives the above excess payment of P121,780.00 is more than the interest that could be legally charged, and in fact as of January 25, 1989, the total releases have been fully paid.

Is this contention of defendant that she has fully paid her obligations correct?

The Supreme Court ruled in the negative.

The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum. Thus, the Court found that she had paid the total sum of P116,540.00 out of the amount of the loan extended to her.

The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular 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 Medel v. CA (299 SCRA 491 [1998]), the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered contrary to morals, if not against the law. Such stipulation is void.

Since the stipulation on the interest rate is void, it is as if there were no express contracts thereon. Hence, courts may reduce the interest rate as reason and equity demand.

The Supreme Court found no justification to reverse or modify the rate imposed by the two lower courts (Imperial vs. Jaucian, 427 SCRA 517 [2004]).