1) What “interest” means in Philippine loan law

In Philippine civil law, interest is the amount paid for the use of money (or its forbearance), or the amount imposed as damages for delay in paying a monetary obligation. In practice, Philippine cases and contracts commonly deal with three “families” of interest:

Conventional (contractual) interest – the price for borrowing money, set by the parties (e.g., “12% per annum”), subject to legal limits like public policy and unconscionability.
Legal interest – the default interest rate applied when the law treats interest as damages, or when a judgment imposes interest at the “legal rate.” The Civil Code does not fix the number; the Monetary Board/BSP sets the legal rate through circulars, and the courts apply it using Supreme Court guidelines.
Penalty charges / penalty interest – an agreed penal clause for non-payment (often monthly), meant to secure performance and compensate for breach. Courts may reduce it if iniquitous or unconscionable.

A loan in the Civil Code sense (simple loan or mutuum) is typically a loan of money where the borrower must return the same amount. Interest rules for mutuum are strict because interest is never presumed.

2) The Civil Code’s core rule: interest is not due unless agreed in writing (Article 1956)

Article 1956 (Civil Code)

No interest is due unless it has been expressly stipulated in writing.

This single rule drives many outcomes in collection cases:

If there is no written interest stipulation, the lender generally cannot collect contractual interest—even if both parties verbally agreed, even if interest was discussed, and even if the lender “expected” interest.
The borrower still owes the principal.
If the borrower pays interest voluntarily despite no written agreement, disputes can shift into quasi-contract issues (e.g., whether the payment was by mistake), but as a loan rule, interest is not demandable without a written stipulation.

Practical drafting point: Courts require the interest stipulation itself to be in writing. A promissory note, loan agreement, or credit instrument typically satisfies this. Ambiguity is usually construed against the party who caused it (often the lender who drafted the form).

3) If there’s no written interest: can the lender still get “legal interest”?

Yes—but not as “contractual interest.” The lender may recover legal interest as damages if the borrower is in delay (default) in paying a sum of money, under the Civil Code provisions on damages for monetary obligations.

Article 2209 (Civil Code)

If the obligation consists in the payment of a sum of money and the debtor incurs in delay, damages are the payment of:

the interest agreed upon, and
in the absence of stipulation, the legal interest.

So, even if the loan is “interest-free” (because there’s no written stipulation), once the borrower is in delay, the lender can claim legal interest as indemnity—not because the loan had interest, but because delay in paying money produces interest as damages.

4) When is a borrower “in delay” for purposes of legal interest? (Articles 1169 and related rules)

Legal interest under Article 2209 generally begins when the borrower incurs delay (mora solvendi), which is governed primarily by:

Article 1169 (Civil Code) — General rule on delay

The debtor incurs in delay from the time the creditor demands fulfillment, judicially or extrajudicially.

Meaning: As a default rule, demand matters. For many loans, the clock for legal interest as damages starts at:

Extrajudicial demand (e.g., written demand letter, notarized demand, formal notice), or
Judicial demand (filing of the collection case),

unless an exception applies.

Common exceptions where demand is not needed

Under Article 1169, demand is not necessary in specific situations, often including:

when the obligation or the law expressly provides that demand is unnecessary;
when the time of performance is the controlling motive (time is of the essence), making delay automatic upon maturity;
when demand would be useless (e.g., debtor rendered performance impossible).

Loan practice note: Many promissory notes state that upon maturity, the borrower is automatically in default “without need of demand,” or that interest/penalty accrues “until fully paid.” Such clauses can affect when interest starts.

5) The “legal interest rate” in the Philippines: what number applies?

The Civil Code does not state the legal interest rate. The applicable rate has been set through BSP/Monetary Board circulars and implemented through Supreme Court doctrine.

The two key eras you must know

A) 12% per annum era (for many monetary awards)

For many years, the commonly applied legal interest rate for loans/forbearance and certain judgments was 12% per annum, based on Central Bank rules (notably CB Circular No. 416).

B) 6% per annum era (current standard legal rate)

Effective July 1, 2013, BSP Circular No. 799 (Series of 2013) reduced the legal rate to 6% per annum for:

loan or forbearance of money, goods, or credits, and
judgments involving such forbearance.

The transition rule (Supreme Court: Nacar v. Gallery Frames)

The Supreme Court’s landmark ruling in Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013) operationalized the BSP change and clarified that:

Before July 1, 2013, courts used 12% per annum for loans/forbearance (under the Eastern Shipping framework).
From July 1, 2013 onward, the applicable legal rate is 6% per annum.

Practical effect: Many older obligations or judgments are computed with a split-rate:

12% up to June 30, 2013, then
6% from July 1, 2013 until full payment, depending on the nature of the obligation and the time period covered.

6) The Supreme Court’s framework: when courts impose legal interest (especially for loans)

Two doctrines are foundational:

Eastern Shipping Lines, Inc. v. Court of Appeals (G.R. No. 97412, July 12, 1994)
Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013) (modifying Eastern Shipping in light of BSP Circular 799)

For loans and forbearance of money (the category loans usually fall under)

The framework (as updated by Nacar) commonly works like this:

If the obligation is a loan or forbearance of money, then:
- From default (delay) (often from demand or maturity under the contract) until full payment, interest is imposed at:
  - 12% per annum for the period up to June 30, 2013, and
  - 6% per annum for the period from July 1, 2013 onward, unless a valid contractual interest rate applies.

What is “forbearance”?

“Forbearance” is broadly understood as an agreement to refrain from requiring immediate payment of a money obligation—e.g., extensions, restructuring, allowing delayed payment in exchange for compensation. Courts treat this similarly to a loan for legal-interest purposes.

7) Conventional interest vs legal interest: which governs a loan?

Scenario 1: There is a written contractual interest rate

If the loan agreement or promissory note validly provides interest (e.g., “10% per annum”), then:

That contractual rate generally governs as the “interest agreed upon” (Article 2209),
subject to judicial control (see unconscionability below).

If the contract says interest runs “until fully paid”, courts often treat that as continuing beyond maturity until actual payment, though disputes can arise if the wording is unclear, if penalty interest overlaps, or if the rate is unconscionable.

Scenario 2: There is no written interest clause

No contractual interest is collectible (Article 1956).
But if the borrower is in delay, the lender may recover legal interest as damages under Article 2209, typically from demand (or from maturity if demand is contractually waived or an exception applies).

Scenario 3: The interest clause exists but is void or struck down

If the stipulated interest is declared illegal, void, or unconscionable, courts commonly:

reduce it to a reasonable level, and/or
apply the legal interest rate instead, particularly when the original stipulation is oppressive.

8) Unconscionable interest and the court’s power to reduce

Even though statutory “usury ceilings” were effectively lifted by CB Circular No. 905 (1982) (suspending the Usury Law’s ceilings), Philippine courts consistently hold that:

Freedom to contract is not freedom to oppress.
Interest rates may be reduced when they are iniquitous, unconscionable, or shocking to the conscience.

Legal bases commonly invoked

Civil Code Article 1306 (contracts are binding but subject to law, morals, good customs, public order, public policy)
Civil Code Article 1229 (courts may reduce an iniquitous penalty)
Broad equity and jurisprudence on unconscionable terms

Patterns in case outcomes: Courts have repeatedly reduced extremely high monthly rates (e.g., “5% per month,” “10% per month,” and similar) especially when combined with penalty charges, compounding, and attorney’s fees that balloon the debt.

9) Penalty interest, liquidated damages, and overlap with regular interest

Many loan documents impose:

Regular interest (price of money), plus
Penalty interest (for default), plus
Attorney’s fees and costs.

Key points

A penalty clause is meant to secure performance and pre-agree damages.
Courts may reduce penalties that are iniquitous or unconscionable (Article 1229).
When both regular interest and penalty interest apply, courts sometimes examine whether the combined charges are oppressive.

Drafting red flag: A high regular interest plus a high monthly penalty plus compounding often triggers judicial reduction.

10) Anatocism (interest on interest) and compounding: when is it allowed?

Philippine law is cautious about interest earning interest.

Article 1959 (Civil Code) — Interest on interest (an overview rule)

As a general principle, interest due and unpaid does not earn interest, except in limited situations. The law allows interest on interest primarily when:

there is judicial demand (reinforced by Article 2212), and/or
there is a valid stipulation that complies with Civil Code limitations (commonly requiring that the interest has already become due).

Article 2212 (Civil Code) — Judicially demanded interest

Interest due shall itself earn legal interest from the time it is judicially demanded, even if the obligation is silent.

Practical effect in lawsuits: Once a collection case is filed, overdue interest that is part of the claim can itself earn legal interest from the time of judicial demand, depending on how the court frames the award.

Simple vs compound

Legal interest (as imposed by courts) is typically computed as simple interest unless the judgment or contract clearly imposes compounding in a lawful manner.
Compounding must be clearly anchored on a valid stipulation and must not produce unconscionable results.

11) Application of payments: interest is paid before principal (Article 1253)

Article 1253 (Civil Code)

If the debt produces interest, payment of principal is not deemed made until the interest is covered.

Meaning: In partial payments:

payments are usually applied first to interest, then
to the principal (unless a lawful application of payments indicates otherwise).

This matters because it affects the remaining principal base on which interest continues to run.

12) Interest in litigation: pre-judgment interest vs post-judgment interest

Even in pure loan cases, it helps to separate two phases:

A) Pre-judgment phase (before judgment becomes final)

Interest here depends on:

the contract (conventional interest, if valid), and/or
legal interest as damages (Article 2209) if in delay.

B) Post-judgment phase (after finality until satisfaction)

Once a judgment awarding a sum of money becomes final and executory, the unpaid amount is treated as a form of forbearance—the creditor is being forced to wait—so legal interest applies to the adjudged amount until full satisfaction.

Under Nacar, the post-judgment legal interest is 6% per annum from July 1, 2013 onward (and older periods may have 12% before that date, depending on timing).

13) A practical “rates timeline” for quick reference

For loan/forbearance cases (and for money judgments treated as forbearance):

Up to June 30, 2013: 12% per annum (commonly applied legal rate)
From July 1, 2013 onward: 6% per annum (BSP Circular 799; implemented by Nacar)

Because many disputes span multiple years, courts often compute using the split-rate method when the period crosses July 1, 2013.

14) How to compute legal interest (basic method)

Unless the judgment specifies otherwise, legal interest is typically computed as simple interest:

Interest = Principal × Rate × Time

Where:

Rate is 0.12 (12%) or 0.06 (6%) per year, depending on the applicable period;
Time is in years (often computed using days/365, depending on court practice).

Example (illustrative)

Principal: ₱1,000,000 Default date: June 1, 2012 Payment date: August 1, 2014

Period 1: June 1, 2012 to June 30, 2013 at 12% Period 2: July 1, 2013 to August 1, 2014 at 6%

You compute interest separately per segment, then add them, applying partial payments first to interest if applicable (Article 1253).

15) Common issues and litigation pitfalls in Philippine loan interest disputes

1) “There was an agreement on interest, but it wasn’t written”

Courts generally deny contractual interest under Article 1956, but legal interest as damages may still be awarded from delay.

2) “Escalation clauses” and unilateral rate changes

Interest increases must be grounded on valid contract terms and regulatory standards. Philippine jurisprudence has been skeptical of clauses allowing lenders to increase rates unilaterally without clear standards and borrower protection (often requiring mechanisms that are not purely one-sided).

3) Layering charges

Regular interest + penalty interest + service charges + compounding + attorney’s fees can be attacked as oppressive. Courts may:

reduce penalty (Article 1229),
reduce interest as unconscionable, and/or
impose only legal interest.

4) When exactly did default begin?

Because legal interest as damages usually requires delay (Article 1169), the start date often becomes the battlefield:

demand letter date,
maturity date,
filing date of the case,
or another date fixed by the contract (e.g., “without need of demand”).

16) Key takeaways (doctrinal summary)

Interest is not presumed. Without a written stipulation, contractual interest is not collectible (Article 1956).
Even without contractual interest, a lender can recover legal interest as damages once the borrower is in delay in paying a sum of money (Articles 1169 and 2209).
The legal interest rate is not stated in the Civil Code; it is set by BSP circulars and applied through Supreme Court doctrine.
The operational rule today is generally 6% per annum from July 1, 2013 onward (Nacar; BSP Circular 799), with older periods often computed at 12% per annum up to June 30, 2013 depending on the applicable timeframe.
Interest on interest is restricted and commonly turns on judicial demand (Articles 1959 and 2212).
Payments generally go first to interest before principal (Article 1253).
Courts may reduce unconscionable interest and penalties despite contractual stipulations, using Civil Code policy limits and equity (Articles 1229 and 1306; jurisprudence).