Legal Interest in the Philippines: How to Compute the Amount You Owe on an Unpaid Loan

Philippine context • Practical, step-by-step guide • With controlling Civil Code provisions and leading Supreme Court doctrines (no web browsing used)

1) The big picture

When a loan in the Philippines goes unpaid, the amount you owe typically includes:

Principal (the amount borrowed)
Contractual interest (if validly agreed to in writing)
Penalties/late charges (if agreed, and not unconscionable)
Legal interest (the court-imposed rate that fills gaps or applies upon default/judgment)
Judgment interest (legal interest from finality of judgment until payment)
Attorney’s fees/costs (only if awarded or stipulated)

The exact combination depends on your documents and the timing of default.

2) Core legal rules and where they come from (plain English)

Civil Code anchor provisions

Art. 1956 – No interest is due unless expressly stipulated in writing.
Art. 2209 – For a money debt in delay, damages = agreed interest; if none, legal interest applies.
Art. 1169 – Delay (mora) generally begins upon judicial or extrajudicial demand; demand may be unnecessary if the obligation or law so provides, or the due date is fixed (“day certain”), or demand would be useless.
Art. 2212 – Interest due (i.e., unpaid interest) earns legal interest from the time it is judicially demanded (interest-on-interest only after suit is filed).
Art. 1253 – If a debt produces interest, payments are applied to interest first, then to principal.
Arts. 1226–1230 – Penalty clauses are allowed; courts may reduce iniquitous or unconscionable penalties (Art. 1229).
Art. 2210 – Courts may allow interest on damages in their discretion where the law does not otherwise provide.

Usury and legal interest rates (timeline)

Usury ceilings are suspended (Central Bank Circ. No. 905 [1982]). Parties may agree on rates, but courts strike down rates/penalties that are unconscionable (e.g., Medel v. CA, and many cases reducing 3–6% per month rates).
Before July 1, 2013: 12% per annum legal interest for loans/forbearance (from CB MB Circ. 416; doctrine consolidated in Eastern Shipping Lines v. CA, G.R. No. 97412, 12 July 1994).
Effective July 1, 2013 onwards: 6% per annum legal interest (BSP-MB Circ. 799). Landmark case: Nacar v. Gallery Frames (G.R. No. 189871, 13 Aug 2013) which recast the rules and the switch-over from 12% to 6%.

The Nacar framework (what most courts use today)

Loans/forbearance of money
- With a valid stipulated rate → use that rate until finality of judgment (subject to possible reduction if unconscionable).
- No rate (or invalid/unconscionable) → legal interest applies:
  - 12% p.a. up to June 30, 2013, then
  - 6% p.a. from July 1, 2013 until finality of judgment.
Unliquidated damages (not a loan/forbearance)
- Generally 6% p.a. from the date of judgment (not from demand), since the amount was not yet determined.
After finality of judgment (“judgment interest”)
- 6% p.a. on the total monetary award (principal plus pre-finality interest and damages as finally adjudged) from finality until full satisfaction.

3) Identify your scenario first (a short decision map)

Is there a written interest clause?
- Yes → Use it (unless unconscionable). Check if it also has default/penalty interest, compounding, and a 360-day vs 365-day year.
- No → Apply legal interest (see §4).
When did delay start?
- Fixed maturity date → often no demand needed; delay starts on due date (Art. 1169 exceptions).
- Payable “on demand” → delay starts only upon demand (letter/email/notice, or the complaint’s filing date).
Are there penalties?
- If yes, compute them as stipulated but be ready to temper if excessive (Art. 1229). Penalty is separate from interest if that’s the clear intent, but courts may avoid double recovery.
Is there a lawsuit?
- If yes, interest due can itself earn legal interest from filing (Art. 2212).
- From finality of a monetary judgment → 6% p.a. on the entire award until paid (Nacar).

4) The legal interest rate you’ll use

Without a valid written rate (or the clause is void/unconscionable):
- Until June 30, 2013: 12% per annum
- From July 1, 2013 onward: 6% per annum
With a valid written rate:
- Use the contract rate up to finality of judgment; 6% p.a. after finality on the total award.
- Courts may reduce rates/penalties that are iniquitous or shocking to conscience (typical red flags: ≥3% per month, simultaneous high penalty + high interest, unending compounding, etc.).

5) Counting time and doing the math

A. Day-count convention

If the contract says nothing: courts typically compute simple interest on a 365-day year (calendar basis).
If the contract says 360-day year (banking style), use that for contractual interest (unless illegal/unconscionable).
Exclude the start date and include the end date is a common approach, but courts mainly require consistency.

B. Simple interest formula

$$ \text{Interest} ;=; \text{Principal} \times \text{Rate (per year)} \times \frac{\text{number of days}}{\text{basis (365 or 360)}} $$

C. Application of payments (very important!)

Art. 1253: Payment goes to interest first, then principal.
If there are penalties, check the clause; courts may apply penalties and interest separately but reduce if oppressive.

D. Compounding / “interest on interest”

No compounding by default. It needs clear stipulation, and even then courts may curb it.
Art. 2212 allows legal interest on unpaid interest from the date you file suit (judicial demand), even without a compounding clause.

6) Worked examples (with careful arithmetic)

All samples use simple interest and a 365-day year unless stated.

Example 1 — No stipulated interest (pure legal interest)

Principal = ₱150,000
Due date = 15 Mar 2022 (fixed date) → delay starts that day
As-of date = 7 Sep 2025
Legal rate = 6% p.a. (all dates are after July 1, 2013)

Days of delay: 15 Mar 2022 → 7 Sep 2025 = 1,272 days Interest: ₱150,000 × 0.06 × (1,272 / 365) = ₱150,000 × 0.06 × 3.48493 ≈ ₱31,364.38 Amount due: ₱181,364.38

Example 2 — Crossing the 2013 switch + judgment interest (Nacar)

Principal = ₱200,000
Due date = 1 Mar 2010 (delay starts then)
Case filed later; finality of judgment = 30 Sep 2016
Actually paid on 31 Dec 2017

Pre-finality interest (legal interest):

12% p.a.: 1 Mar 2010 → 30 Jun 2013 = 1,217 days
- ₱200,000 × 0.12 × (1,217/365) ≈ ₱80,021.92
6% p.a.: 1 Jul 2013 → 30 Sep 2016 = 1,187 days
- ₱200,000 × 0.06 × (1,187/365) ≈ ₱39,024.66

Total at finality (pre-finality only): ₱200,000 + ₱80,021.92 + ₱39,024.66 = ₱319,046.58

Judgment interest (6% p.a.) on ₱319,046.58: 30 Sep 2016 → 31 Dec 2017 = 457 days

₱319,046.58 × 0.06 × (457/365) ≈ ₱23,967.83

Grand total at payment: ₱319,046.58 + ₱23,967.83 = ₱343,014.41

Example 3 — With a (reasonable) contract rate + partial payments

Principal = ₱100,000
Contract rate = 24% p.a. (valid, simple interest, 365-day year)
Due = 1 Jan 2024
Payment #1 = ₱20,000 on 1 Jun 2024
Payment #2 = ₱30,000 on 1 Jan 2025
Compute balance as of 7 Sep 2025

1) 1 Jan 2024 → 1 Jun 2024 = 152 days Interest = 100,000 × 0.24 × (152/365) ≈ ₱9,994.52 Apply ₱20,000 to interest first (Art. 1253):

Interest covered ₱9,994.52; remainder ₱10,005.48 reduces principal.
New principal = 100,000 − 10,005.48 = ₱89,994.52

2) 1 Jun 2024 → 1 Jan 2025 = 214 days Interest = 89,994.52 × 0.24 × (214/365) ≈ ₱12,663.34 Apply ₱30,000:

Interest covered ₱12,663.34; remainder ₱17,336.66 reduces principal.
New principal = 89,994.52 − 17,336.66 = ₱72,657.86

3) 1 Jan 2025 → 7 Sep 2025 = 249 days Interest = 72,657.86 × 0.24 × (249/365) ≈ ₱11,895.98

Balance as of 7 Sep 2025: Principal ₱72,657.86 + Interest ₱11,895.98 = ₱84,553.84 (No penalties assumed. Add them only if validly stipulated and not unconscionable.)

7) How to compute your own amount due (checklist)

Gather the papers
- Promissory note/loan agreement/terms sheet
- Any amendments, demands, receipts, official statements
- Check clauses on interest rate, default/penalty interest, compounding, day-count (360/365), due date or “on demand.”
Fix the timeline
- When was it due?
- Was a demand sent? (if “on demand,” this matters a lot)
- Were partial payments made? When and how much?
- Was a case filed? When did judgment become final?
Choose the rate(s)
- Contract rate (if valid) vs. legal interest (12% up to 6/30/2013; 6% from 7/1/2013).
- Penalty terms (temper if punitive).
Do the math in segments
- Compute simple interest period by period (rate × days/365).
- Apply payments to interest first (Art. 1253), then reduce principal.
- If sued, consider Art. 2212 (unpaid interest earns legal interest from filing).
- If there’s a final judgment, add 6% p.a. from finality on the total award.
Round and document
- Keep a table showing date from / date to / days / basis / rate / interest / running total.
- Note any assumptions (e.g., day-count, whether demand was unnecessary due to fixed maturity).

8) Common pitfalls (and how to avoid them)

Charging interest without a written clause → Not allowed (Art. 1956); use legal interest instead.
Wrong start date → For “on demand” loans, delay doesn’t start until demand.
Ignoring the 2013 switch → Use 12% only up to 6/30/2013; 6% thereafter.
Double recovery → Don’t pile high penalty + high interest + compounding; courts may reduce.
Misapplying payments → Always interest first, then principal (Art. 1253).
Compounding without a clause → Not allowed; Art. 2212 only gives interest-on-interest after filing of the case.
Using bank 360-day basis without a clause → Default to 365 unless the contract says otherwise.

9) Quick spreadsheet setup (ready-to-use structure)

Segment	From	To	Days	Basis	Rate (p.a.)	Principal Start	Interest	Payment	Principal End	Notes
1	(due/demand date)	(payment/next date)	`=DAYS(To,From)`	365	e.g. 0.06	(start)	`=PrincipalRateDays/Basis`	(input)	`=Principal + 0 - max(Payment-Interest,0)`	interest first
2	…	…	…	…	…	(carryover)	…	…	…	…
n	…	today	…	…	…	…	…	…	…	judgment interest if any

(Replace 0.06 with your contract or legal rate per segment; switch to 0.12 before 7/1/2013 where applicable.)

10) FAQs

Q: If the contract rate is very high (e.g., 5% per month) will courts enforce it? A: Courts often reduce rates they find unconscionable (many cases cut 3–6% per month). Expect a reduction toward reasonable levels (often mapped to the legal rate), especially when combined with penalties.

Q: Can the creditor collect both interest and penalties? A: Yes, if distinctly stipulated, but courts moderate to prevent oppression or double recovery and may reduce penalties (Art. 1229).

Q: Do I owe interest after a judgment? A: Yes—6% p.a. from finality of judgment on the total monetary award until it’s fully paid (Nacar).

Q: What if I paid some amounts along the way? A: Payments first extinguish interest, then reduce principal (Art. 1253). This changes the base for interest in later periods.

Q: What about prescription (time bar)? A: An action on a written loan generally prescribes in 10 years (Civil Code, Art. 1144), usually counted from default (e.g., due date or demand).

11) Final reminders (practical)

Keep dated proof of demands and payments (receipts, bank confirmations, demand letters).
If you anticipate litigation, maintain a clean computation sheet that tracks segments, rates, days, and running totals.
This is a general guide for the Philippine legal setting; specific facts (e.g., special laws, lender type, regulatory caps, or unusual clauses) can change outcomes.

If you want, paste your actual dates and clauses, and I’ll run the numbers precisely using the framework above.