Legal Interest Rate for Individuals in the Philippines: A Comprehensive Guide
(Updated 15 July 2025 – for academic discussion only; not a substitute for professional legal advice.)
1. What Is “Legal Interest”?
Philippine law recognizes two broad kinds of monetary interest:
| Type | Governing Basis | Brief Description |
|---|---|---|
| Conventional (stipulated) | Civil Code Art. 1956 | Interest expressly and in writing agreed by the parties. |
| Legal | Civil Code Arts. 2209-2213; BSP circulars; jurisprudence | Imposed by law or the courts when (a) no rate is stipulated or (b) interest is part of damages or a judgment award. |
If the contract is silent, or a court later awards damages, the “legal interest rate” fills the gap.
2. Statutory & Regulatory Foundations
Civil Code (1950)
- Art. 1956 – No interest is due unless expressly stipulated and in writing.
- Art. 2209 – If an obligor incurs delay (mora) in the loan or forbearance of money, goods, or credits, legal interest is imposed at the rate fixed by law, currently 6 % p.a., unless a different lawful rate is agreed.
- Arts. 2210-2213 – Authorize courts to award interest as part of actual or moral damages; interest on unliquidated claims runs only from the time the amount is ascertained (usually the decision).
Usury Law (Act No. 2655, 1916) Once capped interest at 6-12 % p.a. in various cases, but the Monetary Board suspended all ceilings via Central Bank (CB) Circular 905 (10 Dec 1982). Courts may still strike down unconscionable rates (see § 6).
Bangko Sentral ng Pilipinas (BSP) Circulars
Circular Effectivity Subject Legal Interest Set CB Circular 416 29 July 1974 Loans or forbearance; judgments thereon 12 % p.a. BSP Circular 799 1 July 2013 Same matters 6 % p.a. Circular 799 is the present reference: 6 % simple interest per annum, subject to periodic review by the BSP Monetary Board under RA 7653 (New Central Bank Act).
3. Doctrinal Evolution in the Supreme Court
| Era | Leading Cases | Key Holdings |
|---|---|---|
| Pre-1974 | Malayan Insurance v. Alberto (1968) | Civil Code’s default 6 % applied. |
| 12 % Period (1974-30 June 2013) | Reformina v. FIDES Realty (1985); Eastern Shipping Lines v. CA (1988) | Adopted 12 % under CB 416 for (a) loans/forbearance and (b) judgments involving a sum of money. |
| Modern 6 % Period (1 July 2013 →) | Nacar v. Gallery Frames, G.R. 189871, 13 Aug 2013 | (1) Replaced 12 % with 6 % in line with BSP 799; (2) Laid down a two-tier rule for interest: • Loans/Forbearance – 6 % from demand or default until full payment. • Judgment Awards – 6 % from finality of judgment until satisfaction, regardless of nature of obligation. |
Subsequent cases (Sps. Abella v. Sps. Acebedo, 2020; Development Bank of the Phils. v. Sps. Arcilla, 2022) simply applied Nacar.
4. When and How the 6 % Legal Interest Applies
| Scenario (post-1 July 2013) | Rate | Accrual Point | Remarks |
|---|---|---|---|
| A. Loan or Forbearance of Money, Goods, Credits (no valid stipulation) | 6 % | Date of extrajudicial demand, or if none, date of filing of complaint | “Forbearance” means creditor’s money or property is withheld. |
| B. Liquidated Money Claims (price of a delivered good, sums stated in contract) | 6 % | Date of judicial or extrajudicial demand | Includes unpaid rentals, professional fees. |
| C. Unliquidated or Indeterminate Damages (e.g., tort) | 6 % | Date of decision (when amount becomes certain) | Art. 2213; no interest before liquidation unless bad faith proven. |
| D. Judgments Awarding a Specific Sum | 6 % | From finality of judgment until paid | Interest here is compensatory, not moratory. |
| E. Stipulated Interest Ceilings Absent | Whatever parties agreed if not unconscionable; otherwise court may reduce to 6 % or equitable rate | – | See § 6 below. |
| F. Judgment During 12 % Era but Unpaid Past 30 June 2013 | 12 % up to 30 June 2013, then 6 % thereafter | Nacar transition rule | Courts prorate accordingly. |
➡ Simple, not compounded, unless parties expressly agree or a statute authorizes compounding (rare).
5. Sample Computation (Illustrative Only)
Loan of ₱ 100,000 with no written interest; demand letter sent 15 Jan 2024; fully paid 15 Jan 2025.
- Principal: ₱ 100,000
- Interest Period: 15 Jan 2024 – 15 Jan 2025 = 365 days
- Legal Interest: ₱ 100,000 × 6 % × (365 / 365) = ₱ 6,000
- Total Due: ₱ 106,000
If payment followed after judgment became final on 15 Mar 2025, interest would run from 15 Mar 2025 until satisfaction.
6. Judicial Control of Unconscionable Interest
While the BSP lifted statutory ceilings, courts police “shocking” or “inordinate” rates:
- Medel v. CA (1999) – Struck down 66 % p.a.; reduced to 12 %.
- Spouses Abella v. Abella (2020) – Reduced 5 % per month (≈ 60 % p.a.) to 6 %.
- Guideline: Rates over market norms (currently around 12-24 % p.a. for consumer loans) risk reduction.
7. Interaction with Other Financial Rules
| Context | Distinction from Legal Interest |
|---|---|
| Bank Savings/Time Deposits | Governed by BSP policies on deposit rates; withholding tax of 20 % applies to individuals. |
| Credit Cards & Micro-financing | Contractual rates + finance charges; subject to BSP caps (e.g., 24 % p.a. total finance charge ceiling per Circular 1165, 2023). |
| Tax Treatment of Court-awarded Interest | Income tax-exempt if interest is part of damages for personal injury (e.g., moral damages). Otherwise, subject to 20 % final tax if characterized as interest income. |
8. Prescription of Interest Claims
- Loans/Forbearance – 10-year prescriptive period under Art. 1144 (written contracts).
- Interest As Damages – Follows the principal claim’s prescriptive period.
- Judgment Interest – Runs until fully satisfied; enforcement of judgment generally prescribes in 5 years from entry (Rules of Court 64.6), but revival of judgment is possible within 10 years.
9. Practical Tips for Individuals
- Put It in Writing: To charge more (or less) than 6 %, the rate must appear in a written agreement.
- Stay Within Reason: Even contractual freedom bows to the test of conscionability. Keep rates near market averages.
- Demand Promptly: Interest runs only upon valid demand or default. Use dated demand letters.
- Compute Simply: Unless agreed, apply simple 6 % interest without compounding.
- Mind Transitions: If your claim straddles 30 June 2013, segregate 12 % and 6 % periods.
- Litigation Strategy: For unliquidated claims (e.g., personal injury), request interest from the filing date; courts may grant from decision but earlier if bad faith is shown.
10. Conclusion
Today, the default legal interest rate in the Philippines is a flat 6 % per annum for loans, forbearance of money, and court-adjudged monetary awards involving individuals. This rate—anchored on BSP Circular 799 and refined by Nacar v. Gallery Frames—balances creditor compensation with debtor protection. While parties remain free to stipulate higher rates after the Usury Law ceilings were suspended, such rates must always pass the tests of express written consent and judicial fairness.
Individuals dealing in lending, borrowing, or litigating monetary claims should therefore:
- memorialize interest stipulations clearly,
- calibrate rates to market practice, and
- be ready to apply (or seek) the 6 % legal benchmark when contracts are silent or unenforceable.
Disclaimer: This article is for educational purposes and does not establish an attorney-client relationship.