SC: Unconscionable interest rate is void ab initio

In Castro v. Tan,[1] the Supreme Court held that the willingness of the parties to enter into a relation involving an unconscionable interest rate is inconsequential to the validity of the stipulated rate:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.[2]

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law."[3]

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors would be wanting. The lowest rates that have previously been considered unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of the parties' contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for the creditor's unjust enrichment at the expense of another.

---

[1] 620 Phil. 239, (2009) [Per J. Del Castillo, Second Division].

[2] Id. at 242-243, citing Ibarra v. Aveyro, 37 Phil. 273, 282 (1917) [Per J. Torres, First Division].

[3] Id. at 248, citing CIVIL CODE, art. 1306.