Supreme Court Refines Guidelines for Declaring Interest Rates as Unconscionable

Since the suspension of the Usury Law, contracting parties have the freedom to agree on any interest rate. However, Courts have ruled that interest rates may be deemed unconscionable depending on the context in which they were imposed. In the case of Pabalan v. Sabnani (G.R. 211363, 2023), the Supreme Court ruled that courts should first make a determination of whether the parties stood on equal footing before declaring interest rates as unconscionable and void. The Supreme Court sets guidelines for future cases by providing the following factors to consider:

1. The backgrounds and personal circumstances of the parties, such as, but not limited to, educational attainment, employment, financial status, or professional history, to verify whether one of the parties was disadvantaged due to moral dependence, mental weakness, or tender age.

2. The history and relationship of the contracting parties to ascertain if the agreement involves an isolated transaction or the agreement is only a part of a bigger series of agreements.

3. The context and facts surrounding the negotiations to determine whether the agreement was reached through clear and fair negotiations and whether the contracting parties had equal bargaining power.

4. External factors that may have influenced a party’s decision to examine whether there was undue pressure or an exigent circumstance that could have affected the voluntariness of one of the parties.

Borrowers now face increased scrutiny, making it more challenging to free themselves from high-interest loan agreements. Conversely, by referring to the guidelines set in Pabalan, creditors gain greater flexibility in setting interest rates.