Are Car Lenders Allowed to Charge Accrued and “Payment-Holiday” Interest in the Philippines?

This explainer is for general information only and is not legal advice.

Short answer

Yes, but with limits. In the Philippines, a car lender (bank or financing company) may generally (1) charge contractual interest that continues to accrue during a deferral or “payment holiday,” and (2) capitalize or collect that accrued amount later—if the contract expressly allows it, the practice complies with law and regulation, and it is not unconscionable or deceptive. When a law-mandated grace period applies (e.g., COVID-era statutes), the lender’s ability to charge and compound interest can be restricted by statute and regulator guidance. Compounding (“interest on interest”) requires an express written stipulation and is subject to judicial moderation.

The legal building blocks

1) Civil Code principles on interest

Interest must be expressly stipulated in writing. Without a written stipulation, only legal interest applies. (Civil Code Art. 1956.)
No interest on unpaid interest unless expressly agreed (and even then courts can moderate). (Civil Code Art. 1959; see also Art. 2212 on legal interest from judicial demand.)
Penalty clauses may be reduced if iniquitous or unconscionable. (Civil Code Art. 1229/2227.)
Good faith and fairness govern performance of contracts; ambiguous terms are construed against the drafter (typically the lender).

2) Usury ceilings removed, but rates still reviewable

The Usury Law ceilings were effectively suspended (Central Bank Circular No. 905, 1982). There is no fixed cap—but courts strike down or reduce unconscionable rates and penalty charges. Supreme Court cases have repeatedly moderated rates such as 3%–5% per month and excessive penalties as “iniquitous.”

3) “Legal interest” benchmark

If no valid written rate applies, legal interest is 6% per annum for loans or forbearance of money, under Nacar v. Gallery Frames (2013) and subsequent rulings.

4) Truth in Lending & financing disclosures

Truth in Lending Act (RA 3765) requires clear disclosure of the finance charge (interest, fees) and effective cost of credit before consummation.
Financing Company Act (RA 8556) and its IRR likewise require transparent pricing and responsible collection practices for non-bank lenders.

5) Modern consumer-protection overlay

Financial Products and Services Consumer Protection Act (RA 11765, 2022) empowers the BSP/SEC/IC to police unfair, deceptive, abusive acts or practices (UDAAP)—including opaque “payment holiday” mechanics, surprise fees, or unfair collection.
BSP’s consumer-protection framework expects clear, prominent disclosures, fair treatment, and complaint handling.

6) Chattel Mortgage & remedies on default

Car loans are typically secured by a chattel mortgage (Act No. 1508). On default, the lender may foreclose and recover deficiency subject to lawful interest and charges. If a payment holiday is in place (statutory or agreed), the borrower is not in default during the covered period, so default interest/penalties should not run unless the law or agreement says otherwise.

What exactly is a “payment holiday”?

A payment holiday (a grace/deferment period) is when amounts that were due are postponed to a later date. It can be:

Statutory/Regulatory (e.g., during COVID-19 under the Bayanihan laws):
- Grace periods were mandatory for due installments.
- No penalties, fees, or “interest on interest” were allowed during the statutory grace period.
- Accrued (simple) interest for the deferred period could be paid later (often amortized across remaining terms), but not compounded unless specifically permitted by law/regulators.
Contractual or lender-offered (ex gratia or via restructuring):
- The original contract or a restructuring agreement may allow accrual of interest during the holiday.
- Compounding/capitalization of interest is valid only if expressly stipulated and not unconscionable.
- Any new charges must be disclosed up front; hidden or confusing mechanics risk UDAAP violations.

Can lenders charge interest that accrues during the holiday?

A) Under statutory grace periods (e.g., COVID laws)

Permitted: charging simple accrued interest on the principal portion that was deferred, then collecting it later (often by spreading over the remaining tenor).
Prohibited: penalties, fees, and interest on accrued interest (compounding), unless the statute/regulator expressly allowed otherwise.
Effect on tenor: Lenders typically extend the loan term to keep installment amounts manageable.

B) Under purely contractual holidays

Default approach: If the contract or restructuring says so, interest keeps accruing during the deferment.
Compounding: Allowed only if clearly and expressly stipulated; otherwise, simple (non-compounding) accrual applies.
Reasonableness check: Excessive holiday-period rates or “gotcha” fees can be invalidated as unconscionable or deceptive.

Practical guardrails for lenders

Use plain-English disclosures: Spell out (i) whether interest continues to accrue during the holiday, (ii) whether accrued interest will compound or merely be added once later, (iii) how it will be paid (lump sum vs. spread), and (iv) how the tenor or installment changes.
No retroactive surprises: Don’t re-characterize deferred amounts later as “past-due” just to trigger penalties. If it’s a holiday, it’s not default.
Moderate rates/penalties: Keep within industry norms; courts scrutinize monthly rates and stacked charges.
Honor Truth in Lending: Provide the effective interest rate (EIR) and total finance charge reflecting the deferment.
Document consent: For any restructuring or capitalization, obtain written borrower assent.

Practical guardrails for borrowers

Find the magic words: Look for “interest shall continue to accrue during the payment holiday,” “capitalization,” or “compounding.” If absent, argue for simple accrual only (no interest on interest).
Check the numbers: Ask for a side-by-side amortization:
- (a) original schedule;
- (b) with holiday + simple accrued interest;
- (c) with holiday + compounded interest (if proposed). You’re entitled to see the EIR and total amount payable.
Scrutinize “admin fees”: Unless clearly disclosed and reasonable, challenge add-ons.
Escalate smartly: Use the lender’s complaints channel; if unresolved, go to the appropriate regulator (BSP for banks/quasi-banks; SEC for financing companies; IC for insurers), citing RA 11765 duties of fairness.

Typical scenarios & outcomes

Two-month voluntary holiday, contract silent on compounding
- Likely valid: simple interest accrues on the deferred principal only; no penalties. The two skipped installments are moved to the end of the term or re-spread. No interest-on-interest absent a clear clause.
Holiday mandated by law/regulator (e.g., calamity grace period)
- Accrued simple interest may be collected later; penalties and compounding are typically barred. Lender may extend the term to avoid payment shock.
Restructuring with express capitalization clause
- Allowed if clearly disclosed and consented to, and the resulting effective rate is not unconscionable. Courts may still reduce iniquitous total charges.

Red lines and common pitfalls

Charging penalties during a valid holiday → usually impermissible (no default).
Compounding without an explicit clause → invalid under the Civil Code.
Opaque disclosures (burying the holiday interest mechanics) → UDAAP risk under RA 11765 and may render terms unenforceable.
Stacking multiple charges (high interest plus heavy penalty rate plus big “processing fee”) → vulnerable to judicial reduction.

FAQs

Q: If my contract is silent on payment-holiday interest, do I owe it? A: You likely owe simple contractual interest that would have run anyway on the principal—but not interest-on-interest or surprise fees. Ambiguities are construed against the lender; ask for a revised schedule showing only simple accrual.

Q: Can the lender add all accrued interest to principal (capitalization)? A: Only with an express, written clause (or a signed restructuring). Even then, excessive outcomes may be moderated by courts.

Q: What if no interest rate was validly agreed? A: 6% per annum legal interest applies; no compounding unless agreed.

Q: Are there permanent moratorium laws for car loans? A: No permanent moratorium. Event-specific statutes (e.g., Bayanihan laws) provided time-bound grace periods with specific rules (no penalties, no compounding; accrued interest payable later).

How to vet your own loan or proposal (a quick checklist)

Contract clause: Does it explicitly say interest continues to accrue during a holiday?
Compounding: Is “capitalization/compounding” plainly stated? If not, insist on simple accrual.
Disclosure pack: Do you have the EIR, finance charge breakdown, and revised amortization?
Fees & penalties: Are they suspended during holidays and reasonable thereafter?
Tenor & total cost: How does the holiday change the maturity date, monthly, and total you’ll pay?
Consent: Have you signed any restructuring knowingly (no pre-ticked boxes, no forced add-ons)?

Bottom line

Accrued interest during a payment holiday is generally chargeable in the Philippines when properly disclosed and contractually allowed, but compounding requires clear written consent and is closely policed for fairness.
Statutory grace periods (like those during COVID-19) limited what lenders could add, typically barring penalties and compounding while allowing simple interest to accrue and be paid later.
Transparency, reasonableness, and consent are the pillars that make holiday-interest charges enforceable.

If you want, share the exact clause or a redacted amortization table and I’ll walk through how the holiday math should work and flag anything that looks off.