Introduction

In the Philippines, personal loans between partners—whether business associates, romantic companions, or family members—can provide financial support during times of need. However, without proper documentation, such arrangements often lead to disputes, misunderstandings, or difficulties in enforcement. Formalizing these loans through legal instruments like promissory notes and demand letters is essential to protect the interests of both the lender and the borrower. This article explores the legal framework under Philippine law, particularly the Civil Code of the Philippines (Republic Act No. 386), which governs contracts of loan (mutuum) and related obligations. It covers the creation, execution, and enforcement of promissory notes, the role of demand letters in collection, and practical considerations to ensure compliance and minimize risks.

While verbal agreements may be enforceable under Article 1403 of the Civil Code if proven by evidence, written documentation is highly recommended to avoid the Statute of Frauds, which requires certain contracts (including those not performable within a year) to be in writing. For loans exceeding PHP 500,000, additional rules under the Anti-Money Laundering Act may apply, but this discussion focuses on standard personal loans.

Understanding Personal Loans Under Philippine Law

A personal loan is a contract of mutuum where one party (the lender) delivers money or fungible things to another (the borrower), who is obliged to return the same amount or quantity of the same kind and quality (Civil Code, Art. 1933). Unlike commodatum (loan of non-fungible items), mutuum involves consumable goods like money.

Key characteristics:

Gratuitous or Onerous: Loans can be without interest (gratuitous) or with interest (onerous). Interest must be expressly stipulated in writing (Art. 1956); otherwise, none is due.
Simple vs. Compound Interest: Compound interest (interest on interest) is allowed only if stipulated and the principal is unpaid (Art. 1959).
Usury Laws: The Usury Law (Act No. 2655) was suspended, and interest rates are now governed by the Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, setting the legal interest at 6% per annum on loans without stipulation, unless otherwise agreed, provided rates are not unconscionable.
Parties Involved: Between partners, the lender and borrower must have legal capacity (at least 18 years old, sound mind). If partners are married, the loan may implicate conjugal property under the Family Code (Art. 121), requiring spousal consent for dispositions.

Formalization prevents loans from being misconstrued as donations, which have tax implications under the Tax Code (Republic Act No. 8424, as amended).

The Promissory Note: A Key Instrument for Formalization

A promissory note is a written unconditional promise by the borrower to pay a definite sum of money to the lender or order, on demand or at a fixed or determinable future time (Negotiable Instruments Law, Act No. 2031, Sec. 184). It serves as prima facie evidence of the debt and simplifies enforcement.

Essential Elements of a Promissory Note

To be valid and enforceable, a promissory note must include:

Date and Place: The date of execution and place (e.g., "Manila, Philippines, [Date]").
Parties: Full names, addresses, and signatures of the borrower (maker) and lender (payee). If partners, specify relationship if relevant (e.g., "business partners").
Principal Amount: In words and figures (e.g., "One Hundred Thousand Pesos (PHP 100,000.00)").
Interest Rate: If applicable, state the rate (e.g., "at 5% per annum") and computation method (simple or compound).
Maturity Date or Terms of Payment: Specify if payable on demand, in installments, or on a fixed date. For demand notes, payment is due upon request.
Collateral or Security: If secured, describe any pledge, mortgage, or guaranty (Civil Code, Arts. 2085-2092 for pledges; Arts. 2093-2123 for mortgages).
Default Provisions: Clauses on penalties for late payment, acceleration of maturity, or attorney's fees (up to 10-20% is reasonable).
Governing Law: State "governed by Philippine laws."
Signatures and Witnesses: Signed by the borrower; witnesses (at least two) add evidentiary weight, though not mandatory.

Notarization and Registration

Notarization: Highly recommended for public documents. A notary public acknowledges the signatures, making the note self-authenticating in court (Rules of Court, Rule 132, Sec. 30). Cost: PHP 200-500 plus 1% documentary stamp tax (DST) on the face value (Tax Code, Sec. 188).
Registration: For secured notes, register mortgages with the Register of Deeds (Property Registration Decree, Presidential Decree No. 1529). Unsecured notes need not be registered but can be for protection against third parties.

Sample Promissory Note

PROMISSORY NOTE

PHP [Amount in Figures]                  [Place], Philippines
[Amount in Words] Pesos                  [Date]

FOR VALUE RECEIVED, I/We [Borrower's Name/s], of legal age, [marital status], residing at [Address], promise to pay to [Lender's Name], or order, the sum of [Amount in Words] Philippine Pesos (PHP [Amount in Figures]), [with/without] interest at the rate of [Rate]% per annum, payable [terms, e.g., in monthly installments of PHP [Installment Amount] starting [Date], until fully paid].

In case of default, the entire balance shall become due and payable, with additional penalties of [Penalty Rate]% per month and attorney's fees equivalent to [Percentage]% of the amount due.

This note is governed by the laws of the Republic of the Philippines.

Maker/s:
___________________________     ___________________________
[Borrower's Signature]          [Co-Maker/Guarantor's Signature, if any]
[Printed Name]                  [Printed Name]

Witnesses:
___________________________     ___________________________
[Signature]                     [Signature]
[Printed Name]                  [Printed Name]

Legal Validity and Enforceability

As a Negotiable Instrument: If it meets NIL requirements (unconditional, payable to order/bearer), it can be transferred, creating holder-in-due-course rights (NIL, Sec. 52).
Statute of Limitations: Actions on written promissory notes prescribe in 10 years (Civil Code, Art. 1144).
Defenses: Borrower may raise defenses like lack of consideration, duress, or payment, but the note shifts the burden of proof.

Demand Letters: Enforcing the Loan

If the borrower defaults, a demand letter is the first step in extrajudicial collection. It is a formal written notice requiring payment, serving as evidence of demand, which is necessary for interest to accrue on delays (Civil Code, Art. 1169) and to start the prescription period in some cases.

When to Send a Demand Letter

Upon maturity or default.
Before filing a court action, as courts favor amicable settlement (Alternative Dispute Resolution Act, Republic Act No. 9285).
If the note is on demand, the letter constitutes the demand.

Contents of a Demand Letter

A effective demand letter should be:

Formal and Professional: On letterhead, dated, and addressed to the borrower.
Reference the Loan: Cite the promissory note, amount, due date, and default details.
Demand Payment: Specify the amount due (principal + interest + penalties), deadline (e.g., 10-30 days), and payment method.
Consequences of Non-Payment: Warn of legal action, such as small claims (up to PHP 400,000) or regular civil suit, plus costs.
Proof of Delivery: Send via registered mail, email with read receipt, or personal service with acknowledgment.

Sample Demand Letter

[Your Letterhead or Address]
[Date]

[Borrower's Name]
[Borrower's Address]

Subject: Demand for Payment of Outstanding Loan

Dear [Borrower's Name],

This serves as a formal demand for the payment of your outstanding obligation under the Promissory Note dated [Date], in the principal amount of PHP [Amount], plus accrued interest of [Interest Amount] and penalties, totaling PHP [Total Due] as of [Current Date].

Despite repeated reminders, you have failed to settle this debt, which became due on [Due Date]. We demand full payment within [Number] days from receipt hereof, to [Payment Instructions, e.g., bank account details].

Failure to comply will compel us to pursue legal remedies, including filing a collection suit before the appropriate court, where you may be liable for additional attorney's fees, costs, and damages.

We urge you to settle this matter amicably to avoid further escalation.

Sincerely,
[Lender's Name]
[Lender's Signature]
[Contact Information]

Legal Effects

Extrajudicial Demand: Starts mora (delay), allowing damages (Art. 1170).
If Ignored: Proceed to barangay conciliation (for amounts up to PHP 300,000 in Metro Manila; Katarungang Pambarangay Law, Local Government Code, Sec. 408), then court.
Court Enforcement: File a complaint for sum of money. If note is notarized, it may qualify for summary procedure (Rules of Court, Rule 35). Judgment can lead to execution via levy on property.

Practical Considerations and Risks

Tax Implications: Interest income is subject to 20% final withholding tax for individuals (Tax Code, Sec. 24(B)). Principal repayment is not taxable.
Between Spouses/Partners: Loans during marriage may be deemed advances from conjugal funds (Family Code, Art. 122), requiring reimbursement upon dissolution.
Guarantors or Sureties: Include them for added security (Civil Code, Arts. 2047-2084). Guaranty is accessory; surety is solidary.
Avoiding Disputes: Use clear language, avoid ambiguity. Consult a lawyer for complex terms.
Alternatives: If informal, use IOUs or simple acknowledgments, but they lack the strength of promissory notes.
Common Pitfalls: Not stipulating interest in writing; failing to demand before suing; exceeding reasonable interest (courts may void unconscionable rates under Art. 1306).
Digital Options: E-promissory notes are valid under the Electronic Commerce Act (Republic Act No. 8792) if electronically signed, but notarization may still require physical presence.

Conclusion

Formalizing personal loans between partners via promissory notes and demand letters ensures clarity, enforceability, and protection under Philippine law. By documenting terms explicitly, parties can maintain relationships while safeguarding financial interests. In cases of default, systematic steps from demand to litigation provide recourse. Always seek legal advice for tailored documents, as this article provides general information and not substitute for professional counsel.