Car loan issues? Here’s how to resolve disputes in the Philippines

Unjustified loan terms & fees/charges

• The effective interest rate exceeds the one stated in the car loan contract, or such changes were not disclosed properly.
• Unexpected fees/hidden charges that weren’t clearly outlined in the agreement can be challenged by the borrower.

Payment Default 

• Late or missed monthly payments can lead to penalties. Here, either the calculated penalty fee or the timing of default can be challenged by the borrower.

Repossession

• The vehicle might get repossessed in case of default. In this case, if the lender fails to give prior notice or follow proper procedure, the borrower can dispute the repossession.

Deficiency claim

• After a car is repossessed by the lender, it is sold via public auction to recover the due amount. However, the lender can claim a ‘deficiency’ if the sales proceeds do not cover the outstanding balance. Here, the borrower can challenge the dispute by questioning the fairness of the auction, price, or any additional charges added to the deficiency.

Harassment by collection agents

• If a lender hires collection agents to threaten or harass the borrower, a formal complaint can be filed by the latter. The law, Consumer Act, and BSP regulations, strictly prohibit lenders from using such abusive tactics to secure payments.

Unclear loan terms

• A car loan agreement is a very important document that mentions loan terms in detail and helps avoid future discrepancies. However, a poorly drafted agreement leads to miscommunication of several important loan-related clauses/terms like applicable fees, timeline, recourse in case of default, etc. A borrower can challenge such unclear clauses on the grounds of being clarity or not being ethical.

Specific laws

Highlights 

Civil Code of the Philippines (RA No. 386)

• It provides general rules regarding contracts and obligations.
• It governs breach of contract issues, interest rates, and default remedies.

Chattel Mortgage Law (Act No. 1508)

• It covers chattel mortgage contracts, and since a car is considered personal property, it is governed by this particular law.
• In the case the borrower defaults, the law outlines the procedure for repossession and sale of the mortgaged property, in this case, the car.

Financing Company Act (RA No. 8556)

• The law governs financing companies and their operations in the Philippines.
• This particular law requires all financing entities to follow fair collection procedures and comply with disclosure requirements.

Bangko Sentral ng Pilipinas (BSP) Regulations

• The BSP supervises banks and several financing companies in the country.
• It issues circulars regarding proper disclosure, fair collection practices, and limits on interest rates.
• Complaints involving financing companies supervised by BSP can be lodged with its Consumer Assistance Mechanism.

Truth in Lending Act (RA No. 3765)

• This act requires lenders/creditors to disclose information regarding interest rates and financial charges.
• The act aims to protect borrowers against hidden and excessive charges.

Consumer Act of the Philippines (RA No. 7394)

• This act enforces consumer protection norms.
• It prohibits unfair sales practices or acts, and in the case of car loan agreements, it applies where consumer rights are implicated.

Bangko Sentral ng Pilipinas (BSP)

• Acts as a supervisor to banks and certain finance providers in the country.
• It has a Consumer Assistance Mechanism in place for mediation purposes.
• Borrowers can lodge complaints concerning the lender's unfair or abusive practices.

Department of Trade and Industry

• It implements the laws under the Consumer Act, and therefore, borrowers can file complaints regarding unfair sales practices by the financing entities.

Securities and Exchange Commission (SEC)

• The financing companies not supervised by BSP are overseen by the SEC.
• Borrowers can file a complaint here if the lender is violating the regulatory rules.

Local Government Units (LGUs)

• Sometimes, LGUs, along with the local mediation offices, assist with consumer complaints. It comes in the form of an informal settlement discussion before the matter reaches the court.

Pre-litigation approaches 

Direct negotiation

The borrower and lender can settle disputes via direct discussion. Here, if the lender agrees, two remedies can be considered - 

• Loan restructuring, wherein more flexible loan terms are negotiated by the borrower, such as reduced interest rates and better payment terms.
• Waiver or reduction of penalties by the lender.

Mediation 

Mediation and conciliation are a great outside the court disputes resolution way. And compared to full-blown litigation, it is less expensive, faster, and less adversarial. Now, there are two types of mediation options available to borrowers - 

• Court-annexed mediation, a court-offered mediation before the trial of the already filed case.
• Private Mediation, voluntarily opted for by parties that are willing to settle outside the court. It can be done via a private mediator or the Philippine Mediation Centre.

Arbitration

If a car loan contract has an arbitration clause, then disputes can be settled outside court via a private arbitrator. Note, an arbitral award is recognized by the Philippine court and enforces judgment similar to the court.

Breach of contract action

• A complaint can be filed by the borrower, if the lender violates the terms of the loan contract. For example, imposing unauthorised fees, premature vehicle repossession.

Petition to enjoin illegal repossession

• If a borrower feels the repossession is unlawful, he/she can file a court case, wherein the court will assess compliance with chattel mortgage requirements.

Damages

• In case a borrower incurs damages due to an act of the lender, like illegal repossession or harassment by a collection agent, he/she can take legal recourse. 

Deficiency claim

• If, after repossession, the lender is unable to settle the due amount, they can ask for the remaining balance. Here, the borrower can contest the claim on the grounds of an unreasonably low sale price and improper foreclosure procedure.

Small claims court

• This one is a more streamlined and less formal way of resolving a dispute. However, disputes within the specific sum are entertained; currently, the threshold is set at PHP 1,000,000 by the Supreme Court.