(Philippine legal framework on stipulated interest, “legal interest,” default/judicial interest, and interest-related disputes.)

1. Why “legal interest rate” is often misunderstood

In Philippine practice, people use “legal interest rate” to mean at least three different things:

The default interest rate supplied by law when a money obligation is due and unpaid (or when interest is awarded as damages).
The court-applied rate on judgments (pre-judgment and post-judgment), which follows Supreme Court rules and the Bangko Sentral ng Pilipinas (BSP) legal rate.
A supposed “maximum allowable” interest rate (a “usury cap”)—which, for most private loans, no longer exists as a fixed ceiling because statutory ceilings have long been suspended, though courts can still strike down or reduce unconscionable interest.

A complete Philippine-context discussion must cover all three.

2. Core legal sources

A. Civil Code provisions (backbone rules)

Key Civil Code concepts that control interest on loans and money obligations:

Freedom to contract, subject to law, morals, good customs, public order, or public policy (Civil Code, Art. 1306).
Mutuality of contracts: the contract must bind both parties; one party cannot unilaterally set or change essential terms (Civil Code, Art. 1308).
Interest must be expressly stipulated in writing to be demandable as “interest” (Civil Code, Art. 1956).
Delay (mora) and damages principles (Civil Code, Arts. 1169, 1170).
If the obligation is to pay a sum of money and the debtor is in delay, damages are generally the payment of interest (Civil Code, Art. 2209).
Interest due itself can earn legal interest from judicial demand in proper cases (Civil Code, Art. 2212).
Penal clauses/liquidated damages may be reduced if iniquitous or unconscionable (Civil Code, Art. 1229).
Application of payments: if a debt produces interest, payments are generally applied first to interest before principal, unless otherwise agreed (Civil Code, Art. 1253).

B. The Usury Law and why “caps” are mostly a court issue today

The old statute imposing interest ceilings is Act No. 2655 (Usury Law), as amended. However, the Monetary Board—through Central Bank Circular No. 905 (1982)—suspended the Usury Law’s interest rate ceilings for most loans/forbearance, effectively removing a general statutory “maximum interest rate” in ordinary lending.

Practical effect:

Parties can agree on interest rates, but
Courts may still invalidate or reduce interest (and related charges) that are unconscionable, iniquitous, shocking, or contrary to morals/public policy, often by applying Civil Code standards and equity.

C. BSP circular on the “legal interest rate”

For the legal interest rate used in many civil cases (including judgments), the BSP changed the long-standing rate:

Before July 1, 2013: 12% per annum was widely applied in loans/forbearance cases (by jurisprudence aligned with then-prevailing BSP policy).
Effective July 1, 2013: BSP Circular No. 799 (2013) set the legal interest rate at 6% per annum.

This 6% per annum is what many now call “the legal interest rate” in the Philippines—especially in litigation and default scenarios.

3. Conventional (stipulated) interest in loan contracts

A. Interest is not presumed

Under Civil Code Art. 1956, no interest is due unless it has been expressly stipulated in writing.

Key consequences:

If a lender proves a loan but cannot prove a written interest stipulation, the lender can usually recover principal, but not conventional interest as “interest.”
However, once the borrower is in delay, the lender may still recover legal interest as damages under Art. 2209 (see Part 5).

B. What counts as “in writing”

The safest practice is a signed promissory note/loan agreement clearly stating:

the rate (e.g., “12% per annum”),
the basis (per annum/per month),
the period (from release date to maturity; and what happens after maturity),
how it is computed (simple vs compounded), and
how payments are applied (interest first, etc.).

In disputes, courts look for clear written proof that the borrower agreed to pay the interest claimed.

C. Freedom to set rates—tempered by unconscionability

Because general usury ceilings were suspended, parties may stipulate rates, but Philippine courts frequently review interest provisions for unconscionability. Common patterns in jurisprudence:

Very high monthly rates (e.g., several percent per month) may be reduced, especially when combined with heavy penalties and charges.
Courts may:
- Strike down the interest clause,
- Reduce it to a “reasonable” rate, or
- Substitute legal interest (often 6% p.a.) in equity, depending on the facts.

There is no single universal numerical threshold in case law; context matters (e.g., bargaining power, nature of transaction, disclosure, presence of penalties, total effective cost).

D. Default interest and penalty charges

Loan documents often impose:

Compensatory interest (price for the use of money) during the loan term, and
Default/moratory interest and/or penalty charges upon late payment.

Even if written, moratory interest and penalties may be reduced under Civil Code Art. 1229 when excessive. Courts may also assess the combined economic burden (interest + penalties + fees) rather than viewing each in isolation.

E. Variable interest, escalation clauses, and unilateral rate changes

In Philippine jurisprudence, unilateral increases by the lender often fail for violating:

Mutuality of contracts (Art. 1308), and
Requirements that escalation clauses be clear, tied to objective standards, and not left solely to one party’s discretion.

A well-drafted escalation clause typically:

states a benchmark (e.g., a reference rate),
includes a de-escalation mechanism where applicable, and
avoids giving the lender purely unilateral power to impose new rates without objective basis and proper notice/consent.

When escalation terms are voided, courts may revert to the original stipulated rate or apply legal interest depending on the contract and equities.

4. “Legal interest” versus “interest as damages”

Philippine law distinguishes the source and purpose of interest:

A. Conventional (compensatory) interest

Source: contract
Purpose: payment for the use of money during the loan/forbearance period
Requirement: written stipulation (Art. 1956)

B. Legal interest as damages for delay (mora)

Source: law (Civil Code Art. 2209)
Purpose: indemnity for delay in paying a money obligation
Typical rate: the BSP “legal interest rate” (commonly 6% p.a. after July 1, 2013)

This is the usual route when:

the loan has no provable written interest, or
the claim is for damages due to late payment of a sum of money, or
a court imposes interest on equitable grounds.

C. Interest on interest (anatocism)

Philippine law is generally cautious about compound interest (“interest on interest”).

Two related Civil Code ideas:

As a rule, interest does not earn interest unless allowed by law or clearly agreed under legally recognized conditions.
Art. 2212 supports the concept that interest due may itself earn legal interest from the time of judicial demand.

In practice, courts scrutinize compounding and capitalization provisions and often require very clear contractual language and fair dealing, especially outside formal banking.

5. When legal interest starts to run: demand, maturity, and delay

A. When is a borrower “in delay”?

Under Civil Code Art. 1169, delay generally begins upon demand (judicial or extrajudicial), unless demand is not necessary by:

stipulation (e.g., “without need of demand”),
law, or
the nature of the obligation (e.g., time is of the essence).

Common loan setup:

The loan has a maturity date;
The contract often states that failure to pay at maturity places the borrower in default without need of demand;
If such a clause exists and is valid, interest as damages may run from maturity; if not, courts often look for proof of demand.

B. Practical rule of thumb

With a written “no need of demand” clause: legal consequences (default interest/penalties, legal interest as damages) often run from maturity.
Without it: a lender should document a clear extrajudicial demand (letter, email, written notice with proof of receipt), because it can control when interest as damages begins.

6. Judicial interest: how courts compute interest in decided cases

When a dispute reaches court, interest is often broken into phases:

A. Pre-judgment interest (before finality of judgment)

Courts apply interest depending on:

whether the obligation is a loan/forbearance of money, goods, or credit, and
whether interest is stipulated and valid, or only legal interest is appropriate.

B. Post-judgment interest (after finality until full payment)

A money judgment that has become final is treated in jurisprudence as involving forbearance of credit; thus, interest continues to run on the adjudged amount until fully satisfied.

C. The Eastern Shipping and Nacar framework (main doctrine)

The Supreme Court’s well-known guidelines began with Eastern Shipping Lines, Inc. v. CA (1994) and were later updated in Nacar v. Gallery Frames (2013) to align with the BSP shift to 6% p.a. effective July 1, 2013.

The essential takeaway:

If the period crosses July 1, 2013, courts typically apply:
- 12% p.a. to the applicable amounts up to June 30, 2013, then
- 6% p.a. from July 1, 2013 onward, until payment—subject to the specific category of obligation and the court’s findings.

Because case-specific classifications matter (loan/forbearance vs other damages; valid stipulated interest vs none; when demand occurred), litigation computations should track:

the principal,
the date(s) of demand/maturity,
the date of filing,
the date of judgment finality, and
the payment date.

7. Is there a “maximum legal interest rate” today?

A. General rule: no universal statutory ceiling for ordinary private loans

For most private lending arrangements, after the suspension of Usury Law ceilings (CB Circular 905), there is no single across-the-board maximum rate written into Philippine statute that applies to all lenders and all loan types.

B. But courts can still cut down extreme rates

Even without a numeric usury ceiling, courts may reduce or nullify interest and charges that are:

unconscionable,
iniquitous,
contrary to morals/public policy, or
imposed through contract terms that violate mutuality or fairness.

This is often where “legal maximum” arguments succeed in practice: not by pointing to a universal cap, but by showing the rate is excessive under jurisprudence and equity.

C. Sector-specific caps and regulatory regimes (important exceptions)

While general private loans have no universal cap, specific products/industries may be regulated by their regulators (e.g., BSP for supervised financial institutions; SEC for lending/financing companies). These regimes can include:

required disclosures,
restrictions on certain fees/charges, and
in some instances, rate/charge ceilings for particular products (for example, BSP has issued rules setting limits for certain bank-related credit products such as credit cards).

Because sector caps are product- and regulator-specific, the “legal rate” question depends heavily on who the lender is (bank vs non-bank; licensed lending company vs informal lender) and what product is involved (credit card vs personal loan vs pawn transaction).

8. Practical drafting and enforcement checklist (Philippine setting)

A. For lenders (to make interest collectible)

Put the interest clause in a signed writing (Art. 1956).
State the rate in clear terms:
- per annum vs per month,
- simple vs compounded,
- when it starts and ends,
- what happens after maturity (does it continue “until fully paid”? does it escalate?).
Keep penalties and fees reasonable to reduce the risk of judicial reduction (Art. 1229).
Use escalation clauses carefully—avoid unilateral discretion (Art. 1308).
Preserve evidence of release of funds, schedule, demands, and partial payments.

B. For borrowers (common defenses/issues)

Challenge interest claimed without a valid written stipulation (Art. 1956).
Challenge unilateral increases and unclear escalation clauses (Art. 1308).
Argue unconscionability when rates/penalties are extreme or oppressive; request judicial reduction.
Check whether payments were properly applied (Art. 1253) and whether illegal/excess charges were capitalized.

9. Computation basics (simple illustrations)

A. Legal interest at 6% per annum

If a court awards ₱100,000 with 6% p.a. legal interest for 1 year:

Interest = 100,000 × 0.06 = ₱6,000
Total after 1 year (simple) = ₱106,000

For shorter periods, prorate by days/months (courts typically apply a day-count consistent with the judgment or accepted practice).

B. When there is no written interest clause

A lender may still recover:

principal, and
legal interest as damages from the point of delay (often demand or maturity, depending on the case), under Art. 2209.

C. Payments generally go to interest first

If the debt “produces interest” and the borrower pays partially, the default rule (Art. 1253) is:

apply payment to interest first, then
the remainder to principal, unless parties agree otherwise.

10. Selected authorities (Philippine)

Civil Code of the Philippines: Arts. 1169, 1170, 1229, 1253, 1306, 1308, 1956, 2209, 2212 Act No. 2655 (Usury Law), as amended Central Bank Circular No. 905 (1982) (suspension of usury ceilings) BSP Circular No. 799 (2013) (legal interest rate at 6% p.a., effective July 1, 2013) Supreme Court jurisprudence: Eastern Shipping Lines, Inc. v. CA (1994); Nacar v. Gallery Frames (2013) and numerous cases applying unconscionability and mutuality principles to interest, penalties, and escalation clauses