In Philippine law, “legal interest” is the rate the law or jurisprudence applies to late payments when parties did not validly agree on an interest rate, or when courts award interest on damages or on money judgments.

For everyday disputes about late payment of debts, unpaid invoices, monetary awards in court cases, and even tax deficiencies, understanding the legal interest rate is crucial.

This is general legal information only, not legal advice for a specific case or dispute.

I. Sources of the legal interest rate

The rules on interest in the Philippines come from a mix of:

Civil Code
- Article 1956 – “No interest shall be due unless it has been expressly stipulated in writing.”
- Article 2209 – In obligations consisting of the payment of a sum of money, and the debtor incurs in delay, the damage due is the payment of interest at the legal rate, unless a different rate is stipulated.
Bangko Sentral ng Pilipinas (BSP)
- Monetary Board circulars set the legal interest rate that courts use as reference (e.g., legal interest on loans or forbearance of money, goods, or credit).
Supreme Court decisions
- Especially:
  - Eastern Shipping Lines, Inc. v. Court of Appeals (1994) – set an earlier framework when the legal rate was 12%.
  - Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013) – updated the framework and confirmed the 6% per annum legal interest rate in light of BSP circulars.

These cases and circulars are what courts and practitioners now follow.

II. The current legal interest rate (as of the latest jurisprudence)

Under BSP policy cited by the Supreme Court in Nacar v. Gallery Frames, the legal interest rate is 6% per annum, simple interest, generally applied to:

Loans or forbearance of money, goods or credit; and
Damages or monetary awards when no other rate is stipulated.

Historically, the rate was 12% per annum, but this changed from 1 July 2013 onward. Since then, courts have consistently applied 6% per annum as the legal rate, subject to some transitional rules for obligations or judgments that pre-date that cut-off.

If you see older commentaries still talking about 12% per year, that usually relates to pre-July 2013 periods or very old cases.

For any question framed as “Philippines 2025”: the governing framework in actual use is still the 6% per annum legal interest under Nacar and existing BSP circulars, unless a new law/circular/jurisprudence later changes it.

III. Contractual interest vs. legal interest

Before looking at late payments, a key distinction:

1. Contractual interest (stipulated interest)

This is the rate agreed in writing by the parties (e.g., “24% per annum,” “3% per month,” etc.).
As a rule, because usury ceilings have been lifted (Usury Law ceilings were effectively removed by Central Bank Circular No. 905), parties in commercial transactions may agree to practically any interest rate.
BUT:
- Courts may strike down iniquitous or unconscionable interest rates and reduce them to the legal rate.
- Very high rates (say 5%–10% per month) have in various cases been reduced by the Supreme Court to the legal rate or to a reasonable figure.

2. Legal interest (by operation of law)

This applies when:

There is no valid written stipulation for interest; or
The stipulated rate is declared void as unconscionable, and the court substitutes the legal interest; or
The court is awarding interest on damages or on a money judgment (even if the original obligation did not bear interest).

For late payments, legal interest is most often used:

As damages for delay in paying a sum of money; and
As post-judgment interest after a court decision.

IV. How legal interest is applied to late payments

A. If there is a valid written interest rate

Before default (delay)
- The contract rate applies according to what the parties agreed (e.g., 12% per annum, or 2% per month).
After default
- The agreed interest rate continues to apply, plus any penalty interest or late payment charges the parties validly stipulated.
- However, if the combined interest/penalty reaches levels the court considers unconscionable, it may:
  - Reduce the contractual rate;
  - Nullify the penalty clause; or
  - Replace them with the legal interest rate (6% per annum).
After court judgment
- When a case is decided, the court may:
  - Enforce the contract rate up to a certain point; then
  - Impose 6% per annum legal interest on the judgment amount from finality of judgment until full payment (following Nacar).

B. If there is no written interest stipulation

Civil Code Article 1956 says: no interest unless expressly stipulated in writing. However, Article 2209 allows the creditor to recover interest at the legal rate as damages when there is delay in paying money.

So, if:

You owe a sum of money;
There is no written agreement about interest;
You failed to pay on time and delay has been established (usually by demand);

Then:

The creditor can claim legal interest at 6% per annum as damages:
- From the date of judicial or extrajudicial demand (depending on the type of obligation and jurisprudence);
- Until full payment, or until a judgment is issued; and then
- At 6% per annum on the judgment amount from finality of judgment until satisfaction.

C. Different scenarios for the start of legal interest

Supreme Court jurisprudence (as refined by Nacar) typically follows these patterns:

Loans and forbearance of money, goods, or credit
- If there is delay in paying a loan or similar monetary obligation, and no contract rate:
  - Legal interest of 6% per annum applies from the date of demand (extrajudicial or judicial), because the debtor is then in default.
Unpaid price or other monetary obligations (ex contractu)
- For obligations arising from a contract (e.g., unpaid purchase price of goods), if the amount is liquidated or readily determinable, courts can also impose 6% per annum from demand.
Damages from quasi-delict or other unliquidated claims (ex delicto)
- When the amount of damages is not yet determined until the court decides (e.g., personal injury, tort claims):
  - Legal interest of 6% per annum usually runs from the date of judgment, not from the date of the incident or demand, since only the judgment fixes the amount.
After finality of judgment
- Whatever type of case, once the judgment has become final and executory, the amount adjudged (whether principal alone, or principal plus interest) usually earns 6% per annum legal interest from finality of judgment until full payment.

V. Typical applications in different areas

1. Late payment of loans and credit facilities

If the loan contract specifies an interest rate:
- That rate applies until maturity or until the court says otherwise.
- In case of default and litigation, the court may:
  - Enforce the contract rate up to a given date;
  - Then apply 6% per annum from judgment or from finality of judgment.
If the loan contract has no written interest stipulation:
- Principal amount only is due, no contractual interest;
- But once the debtor is in default, legal interest (6% per annum) may be imposed as damages from demand until full payment.

2. Late payment of invoices, rentals, and commercial obligations

If the contract or invoice states: “Interest at 2% per month on late payments,” and it is in writing and accepted, that is the agreed interest.
If there is no such clause, but a buyer or lessee pays late, the creditor may claim 6% per annum legal interest as damages from the date of demand.

3. Labor money claims (backwages, benefits, separation pay)

Labor cases involving money claims (e.g., unpaid wages, separation pay, backwages) usually apply 6% per annum legal interest, following Nacar and subsequent labor decisions.
The usual pattern:
- Interest at 6% per annum from the date of judicial or quasi-judicial demand (e.g., filing of the complaint)
- Until full satisfaction of the monetary award.

4. Damages in civil and criminal cases

In personal injury, wrongful death, or damage to property:
- If the damages are unliquidated (amount only ascertained at judgment), 6% per annum generally applies from the date of the decision awarding such damages, not from the incident date.
In criminal cases with civil liability (e.g., estafa, reckless imprudence):
- Courts may award civil indemnity and damages with 6% per annum legal interest, either from the date of filing, date of judgment, or finality, depending on the nature of the obligation and consistent jurisprudence.

5. Taxes and government charges (late payment)

For late payment of national internal revenue taxes (income tax, VAT, etc.):

The National Internal Revenue Code (NIRC) as amended ties the interest on deficiency and delinquent taxes to the legal interest rate for loans set by the BSP.
The idea is that the interest on late payment of taxes is compensation to the government for the use or withholding of money, not just a penalty.
The actual percentage and manner of computation (e.g., “double the legal interest rate,” periods covered, whether deficiency and delinquency interest can be imposed simultaneously) are spelled out in the NIRC and its implementing regulations.
As long as the BSP legal rate remains 6% per annum, the tax interest provisions that refer to this rate will use that figure in their formulas.

Local government taxes (real property tax, business tax) may also impose statutory interest or surcharges, typically set in the Local Government Code and local tax ordinances. These are specific rates (e.g., 2% per month, up to a certain cap), and operate alongside or independently of civil “legal interest.”

VI. Usury, unconscionable interest, and judicial reduction

Even though formal usury ceilings were lifted, courts have kept a safety valve: equity and the Civil Code rules on unconscionable obligations and penalty clauses.

Key points:

Freedom to stipulate ≠ freedom to oppress
- Excessively high interest (e.g., several percent per month plus penalties) has been repeatedly declared unconscionable.
- In such cases, the interest stipulation is void for being iniquitous, but the principal loan remains valid.
Replacement by legal interest
- When the contract interest is struck down:
  - Courts often apply the legal interest (6% per annum) instead, from default until full payment.
- Penalty interest and other excessive charges may also be reduced or removed under Article 1229 of the Civil Code.
No compound interest without stipulation
- “Interest on interest” (compound interest) is not presumed.
- It must be clearly stipulated and is still subject to judicial scrutiny for fairness.

In practical terms, even in 2025, a lender charging, say, 8% per month plus a steep penalty, risks having the Supreme Court step in and reduce the effective rate to the legal interest or something more reasonable.

VII. Practical examples of computing legal interest (6% per annum)

Example 1: No agreed interest, late payment on a ₱100,000 debt

Due date: January 1, 2025
Debtor pays nothing. Creditor makes a written demand on March 1, 2025.
Amount paid only on March 1, 2026.

Legal interest (if court later upholds claim):

Principal: ₱100,000
Legal interest: 6% per annum from March 1, 2025 to March 1, 2026
- That’s one year at 6%: ₱100,000 × 0.06 = ₱6,000
Total: ₱106,000

Example 2: Money judgment

Court decision on June 1, 2025 orders debtor to pay ₱500,000 (principal, no stipulated interest).
Judgment becomes final on July 1, 2025.
Debtor pays on July 1, 2027, i.e., 2 years after finality.

Legal interest:

From finality (July 1, 2025) to July 1, 2027 = 2 years
Legal interest: 6% per annum on ₱500,000
- Annual interest: ₱30,000
- 2 years: ₱60,000
Total payable: ₱560,000

(If the court also awarded pre-judgment interest, that would be an additional, separate calculation.)

VIII. Practical guidance for 2025 contracts and disputes

For contracting parties (creditors/debtors)

Put interest terms in writing.
- Without a written clause, you can’t claim contractual interest—only legal interest as damages if there’s delay.
Avoid abusive interest and penalty rates.
- Extremely high monthly rates invite the risk that a court will strike them down and simply impose the 6% per annum legal interest instead.
Specify when default occurs and how interest is computed.
- For example, interest from due date, or from written demand; whether interest is simple or compounded, and how often.
Distinguish between regular interest and penalty charges.
- Keep penalties reasonable; courts can reduce or cancel them if they are iniquitous.

For those facing claims or suits

Check if there is a valid written stipulation.
- If none, the creditor cannot claim any contractual rate; only legal interest as damages at 6% per annum, and only from delay.
Look for signs of unconscionability.
- If the contract imposes excessive interest and penalties, you can argue for reduction to legal interest.
Understand that judgments earn 6% per annum after finality.
- Once a money judgment becomes final, delay in payment will almost always cost 6% per annum on the entire award until full satisfaction.

IX. Summary

Legal interest rate (Philippines, as used in 2025):
- 6% per annum, simple interest, based on BSP circulars and the Supreme Court ruling in Nacar v. Gallery Frames.
Role of legal interest:
- Default rate for damages when obligations to pay money are not fulfilled and there is no valid written interest stipulation.
- Standard rate for post-judgment interest on money judgments from finality until full payment.
- Replacement rate when contractual interest is void for being iniquitous or unconscionable.
Late payments:
- With a valid written rate → that rate governs, subject to judicial control for fairness.
- Without a written rate → 6% per annum legal interest as damages, generally from demand and then from judgment/finality.
Special regimes (taxes, labor, etc.):
- Often use the legal interest rate as baseline or reference (sometimes doubled or combined with surcharges, depending on statute or regulations).

Anyone dealing with late payments in 2025—whether drafting contracts, collecting debts, or litigating money claims—should assume that, unless a valid and reasonable contract rate applies, 6% per annum legal interest is the default figure the courts will reach for.