Usury Law in the Philippines: When Courts Cut Excessive Interest Rates

The Usury Law in the Philippines has long been suspended, leading many to assume that lenders may charge whatever interest they please. The Supreme Court's decision in Bulos, Jr. v. Yasuma (G.R. No. 164159, July 17, 2007) makes clear that this is not the case. Even with the Usury Law suspended, courts retain the power to strike down interest rates that are unconscionable — and borrowers can invoke that power.

The loan and the dispute

Honorio Bulos, Jr., together with Dr. Ramon Lim and Atty. Bede Tabalingcos, obtained a P2,500,000.00 loan from Koji Yasuma, a Japanese national. The promissory note, signed by Dr. Lim on behalf of the group, imposed 4% interest for three months. If the borrowers failed to pay on time and the loan was rolled over, interest would run monthly at the same rate until the principal was fully paid.

The borrowers defaulted. Partial payment came through a dacion en pago involving parcels of land, leaving a balance the parties fixed at P2,240,000.00. When Atty. Tabalingcos issued a check for that amount, it was dishonored for insufficient funds. Yasuma sued for collection, and the trial court ordered the borrowers to pay the balance plus 21% annual interest and attorney's fees. The Court of Appeals affirmed.

The offer of rural bank shares

Bulos argued that his obligation was extinguished when he offered Yasuma shares of stock in the Rural Bank of Parañaque worth P1,250,000.00. The Court rejected this.

Under Section 4 of Republic Act No. 7353, the Rural Banks Act of 1992, the capital stock of a rural bank must be fully owned and held by Filipino citizens or qualified Philippine corporations — with limited exceptions. Yasuma, a foreigner, could not lawfully own those shares. The assignment was therefore void and could not extinguish the debt. The Court also noted that the bank's shares had already been fully subscribed, so no new certificates could be issued without an approved capital increase.

Because a debt had been established, the burden fell on Bulos to prove payment or extinguishment with legal certainty. He failed to do so.

When is an interest rate unconscionable?

The most significant portion of the ruling concerns the interest rate. The promissory note effectively imposed 4% per month — 48% per annum. The Court called this "highly unconscionable and inordinate."

The Court acknowledged that Central Bank Circular No. 905, s. 1982, effective January 1, 1983, suspended the Usury Law and gave parties wide latitude to agree on interest rates. But that circular, the Court stressed, grants lenders no "carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."

Citing Ruiz v. Court of Appeals and related cases such as Medel v. Court of Appeals and Spouses Solangon v. Salazar, the Court noted that a 3% monthly rate — 36% per annum — had previously been reduced to 1% per month. Applying that jurisprudence, the Court found the trial court's 21% annual rate improper and instead imposed the legal interest of 12% per annum, computed from judicial demand on April 7, 1990. It also ordered 12% interest per annum on the amount due from the finality of the decision until full payment, following the guidelines in Eastern Shipping Lines, Inc. v. Court of Appeals.

Attorney's fees and the fallo rule

Bulos also challenged the attorney's fees of 20% of P2,240,000.00 as excessive. The Court disagreed, finding the award reasonable given that Yasuma had to litigate for over a decade to recover his money.

The decision also addressed a discrepancy: the trial court's dispositive portion awarded 20% attorney's fees, while the body mentioned 10%. The general rule is that the fallo controls, and the Court found the 10% figure to be a typographical error, so the 20% award stood.

Practical takeaways

• The suspension of the Usury Law does not give lenders unlimited freedom. Courts can and will reduce interest rates that are unconscionable.
• A 48% annual interest rate was deemed excessive in this case, and the Court applied the 12% legal interest rate instead.
• Interest on a loan, once judicially demanded, itself earns legal interest, and the 12% rate continues until the judgment is fully satisfied.
• An offer of payment that is legally impossible — such as transferring rural bank shares to a foreigner — does not extinguish a debt.
• When a decision's fallo conflicts with its body, the fallo generally prevails unless the error is unmistakable.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.