Are Accrued Interest and “Payment Holiday” Charges on Car Loans Legal in the Philippines?

Last updated: September 21, 2025. Philippine law cited below; this is general information, not legal advice.

The Short Answer

Accrued interest during a deferred-payment period (“payment holiday”) is generally lawful if it is fully disclosed, expressly agreed, and does not impose “interest on interest” (compounded interest) without written consent or a lawful basis.
Penalties, fees, and very high rates can be reduced or voided by courts when unconscionable or insufficiently disclosed.
Special laws (e.g., the COVID-era grace periods) temporarily barred penalties and “interest on interest” and required re-amortization on fair terms.
If your lender is a bank (BSP-supervised) or a financing/lending company (SEC-supervised), you have statutory disclosure and consumer-protection rights that limit surprise charges and abusive practices.

Key Legal Foundations

1) Freedom to Stipulate Interest—But Not Without Limits

Usury ceilings are effectively suspended (Central Bank Circular No. 905, 1982), so parties may agree on rates.
Courts still strike down “iniquitous or unconscionable” rates or penalty charges under the Civil Code and jurisprudence (e.g., Medel v. Court of Appeals, Neri v. Heirs of Hadjia, and related cases). When courts find rates/penalties unconscionable, they reduce them to reasonable levels.

2) “Interest on Interest” (Compounding) Needs Written Stipulation

Civil Code rules on anatocism (interest earning further interest): overdue interest does not earn more interest unless (a) expressly stipulated in writing, or (b) judicially demanded.
Absent such stipulation or court demand, capitalizing accrued interest (adding it to principal and charging interest on the new sum) is not allowed.

3) Legal (Default) Interest Rates

When law—not the contract—governs interest (e.g., damages, or if the contract is silent), the legal interest applied by courts is 6% p.a. (following Nacar v. Gallery Frames and Monetary Board issuances).

4) Truth in Lending and Transparency

Truth in Lending Act (R.A. 3765) and its rules require lenders to clearly disclose the finance charge (interest, fees, service charges) in writing before consummation, typically via a Disclosure Statement separate from the note.
Hidden or post-hoc charges can be treated as invalid or unfair—and can trigger administrative sanctions.

5) Consumer Protection Overlay

Financial Products and Services Consumer Protection Act (R.A. 11765, 2022) prohibits abusive practices, misleading disclosures, and unfair charges.
Banks are under the Bangko Sentral ng Pilipinas (BSP); financing and lending companies are under the Securities and Exchange Commission (SEC). Both regulators can order refunds, impose fines, and require corrective action.

6) Mandatory Grace Periods During COVID-19 (Now Lapsed but Still Instructive)

Bayanihan to Heal as One Act (R.A. 11469, 2020) and Bayanihan 2 (R.A. 11494, 2020) mandated grace periods (30 days, then a one-time 60 days) for loan payments.
During these periods, lenders could accrue interest on the principal but could not charge interest on interest, penalties, or additional fees; the accrued interest had to be amortized over the remaining term.
These statutes show the policy baseline regulators favor: no surprise fees, no compounding without consent, and fair re-amortization.

What Counts as “Accrued Interest” and “Payment Holiday” Charges?

Accrued interest: the simple interest that keeps running on the outstanding principal while payments are paused. Lawful if your contract clearly allows deferral with interest continuing to run.
Payment holiday charges: any fees or penalties tied to the deferral (e.g., “processing fee,” “extension fee,” “repricing fee,” “rebooking fee”). These are lawful only if (1) disclosed up front, (2) reasonable, and (3) not prohibited by special law or regulator guidance. Courts can strike or reduce them if excessive or insufficiently disclosed.

Compounding, Capitalization, and “Interest on Interest”

Without written consent, lenders cannot:
- Capitalize accrued interest (add it to principal so it itself earns interest); or
- Charge default interest on past-due interest.
With written stipulation, compounding may be permitted; however, courts still review for unconscionability and clarity of disclosure.
Judicial demand can also trigger interest on interest, but only from the date of demand and at the legal rate, unless the court orders otherwise.

Penalties and “Late Payment” Charges

Penalty clauses (e.g., 3% per month on any unpaid amount) are common.
Under Civil Code Articles on obligations and damages, courts may reduce penalties that are iniquitous or unconscionable—especially when coupled with high regular interest and other fees.
Stacking (regular interest + default interest + penalty + compounding + fees) is fertile ground for judicial reduction.

How Deferred-Payment Setups Should Be Structured to Be Enforceable

Clear written consent to the deferral and to how interest behaves during the holiday.
No “interest on interest” unless expressly stipulated; even then, must be reasonable.
Full, pre-consummation disclosure of all finance charges (R.A. 3765): interest rate (per annum), APR or effective rate, total finance charge, and schedule of payments after re-amortization.
Fair re-amortization: accrued simple interest is spread over the remaining term (or settled at a disclosed date) without add-on fees that change the economics unfairly.
No surprise administrative charges post-signing. Any extension/rebooking fee must be in the contract and reasonable.

When Are Accrued Interest and Payment-Holiday Charges Illegal or Unenforceable?

Hidden: Not disclosed in the Disclosure Statement or loan papers.
Unconscionable: Rates or penalty structures that shock the conscience (e.g., very high monthly default interest on top of a high base rate).
Compounded without consent: Capitalizing accrued interest or charging interest on interest without written stipulation (or without judicial demand).
Contrary to special law/regulator directives: e.g., during statutory grace periods when penalties, fees, or interest on interest were prohibited.
Deceptive collection: Misstating the basis of the charge, threatening illegal actions, or obscuring a consumer’s right to dispute—violative of R.A. 11765 and related rules.

Practical Scenarios (Philippine Car Loans)

Bank-issued car loan; 3-month payment holiday
- Likely lawful for simple interest on principal to continue accruing, if disclosed and agreed.
- Not lawful to compound that interest unless the contract clearly says so.
- Extra “processing” fee: must be disclosed and reasonable.
Financing company offers deferral but adds a large “repricing” fee and default interest
- Red flags: stacked charges may be unconscionable; penalties may be reduced by courts.
- If compounding is applied without clear consent, that portion can be voided.
COVID-era missed payments
- For periods covered by Bayanihan 1 & 2, no penalties or interest on interest were allowed; accrued simple interest had to be re-amortized.

How to Review Your Loan and Charges

Checklist

Do you have a Disclosure Statement (Truth in Lending)?
Does the Promissory Note/Loan Agreement state (a) base interest, (b) default interest, (c) penalties, and **(d) whether interest may be compounded or capitalized?
Were payment-holiday terms given to you in writing before you accepted?
Do the math:
- Confirm that accrued interest = principal × annual rate × (days/360 or 365) (per your contract).
- Check if any interest was added to principal; if yes, was capitalization clearly stipulated?
- Identify any fees (extension, rebooking, processing). Were they in the contract and reasonably priced?

Disputing Charges and Seeking Relief

Write the lender (keep copies): demand computation details, cite R.A. 3765 (disclosure), Civil Code (no interest on interest absent stipulation), and R.A. 11765 (unfair practices). Request a recomputation.
Escalate to the proper regulator:
- Banks: BSP Consumer Protection and Market Conduct Office.
- Financing/Lending companies: SEC Corporate Governance and Finance Department (and the SEC Financing & Lending Oversight units).
Mediation/Arbitration: Some lenders include ADR clauses; you can still seek regulatory assistance.
Court action: Ask counsel about annulment or reformation of unconscionable terms, reduction of penalties, and refunds/offsets. Courts routinely moderate excessive interest and penalty charges.

Frequently Asked Questions

Q1: Can my lender charge interest during a payment holiday? Yes—if your contract allows it and it is simple interest on principal. They cannot charge interest on accrued interest without written consent (or court demand).

Q2: Can they add an “extension fee”? Only if it was disclosed and agreed and is reasonable. Courts can strike/trim excessive or surprise fees.

Q3: Is there a hard cap on interest in the Philippines? There is no general usury ceiling today, but unconscionable rates/penalties are reduced by courts.

Q4: My amortization spiked after a deferral—legal? It can be, if the spike results from re-amortizing simple accrued interest and any lawful, disclosed fee. If driven by compounding or undisclosed charges, you can challenge it.

Q5: What if my contract is silent on compounding? Then no compounding—interest on interest is disallowed absent written stipulation.

Takeaways

Accrued simple interest during a payment holiday is usually lawful when clearly disclosed and agreed.
Compounding and stacked penalty schemes face strict scrutiny; written consent and reasonableness are essential.
Transparency and fairness mandates (R.A. 3765; R.A. 11765) give borrowers strong tools to challenge hidden or abusive charges.
If in doubt, request a detailed breakdown, invoke your disclosure rights, and seek BSP/SEC assistance or legal counsel to recompute or reduce unconscionable charges.

Template: Letter Requesting Re-Computation (You Can Adapt)

Subject: Request for Detailed Computation and Re-Computation of Charges Dear [Lender], I refer to Car Loan No. [___]. I request (1) a detailed breakdown of principal, interest (rate and basis), penalties, fees, and any capitalization of interest; (2) copies of the Disclosure Statement and any payment-holiday agreement; and (3) a recomputation that excludes any interest on interest not expressly stipulated, and any undisclosed or unconscionable penalties/fees. This request is made pursuant to R.A. 3765 (Truth in Lending), relevant Civil Code provisions on interest and penalties, and R.A. 11765 on fair treatment and transparency. Kindly respond within ten (10) days. Sincerely, [Name], [Address], [Contact]

If you want, I can turn your specific loan terms and statements into a clean audit showing what’s valid, what’s questionable, and your options to reduce or dispute charges.