Legal Interest Rate on Loans in the Philippines: A Complete Guide

1) Big picture

In the Philippines, parties are generally free to agree on interest for loans and forbearance of money—so long as the rate is written and not unconscionable. If the contract is silent on interest, or if a court needs to fix interest as damages, the legal interest rate is 6% per annum. That 6% benchmark also governs monetary judgments.

These rules come from the Civil Code, the still-existing (but de-teethed) Usury Law, Bangko Sentral ng Pilipinas (BSP) circulars, and Supreme Court jurisprudence—especially the landmark shift to 6% effective July 1, 2013.

2) Sources of law & core doctrines

A. Civil Code anchors

Art. 1956 – No interest is due unless expressly stipulated in writing. • Practical effect: If there’s no written interest clause, only the principal is due (though legal interest as damages may later attach after demand or suit).
Arts. 1959–1960 & 2212 – Interest does not earn interest unless (i) expressly agreed (capitalization/anatocism), or (ii) judicially demanded; once judicially demanded, interest due can earn legal interest.
Art. 2209 – For delay in payment of a sum of money, damages are the payment of interest (the legal rate if none is stipulated).
Arts. 1229 & 2227 – Courts may reduce iniquitous or unconscionable penalties or liquidated damages (a safety valve used to cut down excessive interest and penalty rates).

B. Usury Law (Act No. 2655), as modified

The Usury Law was not repealed, but the interest ceilings were effectively removed by Central Bank/BSP policy (starting with CB Circular No. 905 in 1982).
Consequence: Freedom to stipulate any rate—subject to civil-law limits against unfairness and public policy.

C. BSP circulars and the “legal interest” benchmark

BSP Monetary Board Circular No. 799 (effective July 1, 2013) reset the legal interest rate to 6% per annum (from the old 12%).
The Supreme Court adopted this in Nacar v. Gallery Frames (2013), which remains the controlling framework for legal interest on loans/forbearance and on money judgments.

D. Supreme Court guideposts

Eastern Shipping Lines (1994) – Earlier regime that used 12%; historically important but supplanted in material respects.
Nacar (2013) – Definitively 6% for both (i) loans/forbearance and (ii) judgments, with clear timing rules (see below).
Multiple cases since Nacar consistently strike down 3%–7% per month and similarly steep rates as unconscionable, often trimming to more reasonable levels.

3) What the “legal interest rate” means (6%)

“Legal interest” is the court-imposed rate used when:

No contractual rate exists but there is delay (mora) in paying a sum of money;
A monetary judgment is rendered; and
Interest due itself starts earning interest by operation of law after judicial demand.

The figure is 6% per annum, simple interest, unless parties validly agreed to something else for periods before judgment.

4) How courts compute interest: timelines & scenarios

A. Loan or forbearance of money

If a written rate exists: • Before default: Use the stipulated rate. • Upon default (often from written demand or due date lapse): Keep applying the stipulated rate as compensatory/moratory interest until judgment, unless the rate is void for being unconscionable—in which case courts substitute the legal 6% from default. • From judgment until full payment: 6% per annum (uniform post-judgment rule).
If no written rate (no valid stipulation under Art. 1956): • From default/demand until judgment: 6% as damages. • From judgment until full payment: 6%.

B. Non-loan monetary obligations (e.g., price of goods/services)

From default or demand until judgment: 6% as damages (Nacar).
From judgment until full payment: 6%.

C. When does “default” start?

If the contract sets a due date, default ordinarily starts the day after the due date lapses without payment.
If no due date, default commonly starts upon written extrajudicial demand or filing of the complaint.

D. Interest on interest (capitalization/anatocism)

Permissible only if expressly stipulated and the interest to be capitalized is already due and unpaid, or after judicial demand (Arts. 1959, 1960, 2212).
Even with a clause, courts may disallow or pare back capitalization if it produces unconscionable results.

5) Unconscionable interest & penalty rates

A. What courts look at

Magnitude (e.g., 3%–7% per month, 36%–84% per annum, or stacking multiple charges).
Economic context and disparity of bargaining power.
Cumulative effect of interest + penalty + fees + frequent compounding.

B. Consequences

Court may:
1. Strike down the stipulated rate and substitute 6% from default;
2. Reduce rates and/or penalty charges to equitable levels;
3. Distinguish compensatory/moratory interest from penalty interest and disallow double recoveries if the penalty already covers damages.

6) Special regimes & sectoral caps (overview)

While general loans are uncapped (subject to unconscionability review), regulators sometimes impose policy caps in specific sectors (e.g., credit cards or small-value consumer finance) and require transparent disclosure of finance charges. Always check the current BSP/SEC/DTI issuance for the product type involved. (Even with user-level freedom to stipulate, regulated lenders must follow those product-specific rules.)

7) Drafting an enforceable interest clause

A. Essentials

Put it in writing (Art. 1956).
State: (i) principal, (ii) nominal annual rate (p.a.), (iii) basis of computation (e.g., 365-day year), (iv) the start date for running interest, (v) default interest if different, and (vi) whether compounding applies (and how often).

B. Default & remedies

Define events of default, grace periods, and when default interest kicks in.
If using a penalty (late charges, penalty interest, liquidated damages), clarify whether it is in lieu of or in addition to compensatory interest (courts require clarity and may reduce excessive penalties).

C. Fees & charges

Disclose processing fees, service fees, collection fees, and attorney’s fees (if any). Courts treat hidden or stacked charges skeptically.

D. Variable or floating rates

If tying to a reference rate (e.g., a benchmark), specify: • the benchmark, • reset frequency, • fallbacks if the benchmark becomes unavailable, and • notice mechanics for rate changes.

E. Choice of law & currency

For foreign-currency loans, specify payment currency and any FX conversion mechanics for judgment or collection. Philippine courts enforce lawful foreign-currency obligations but judgments typically specify PHP equivalents at defined times.

8) Litigation checklist (for borrowers & lenders)

Is there a written interest stipulation? If none, no conventional interest is due, but 6% may apply as damages from demand.
Was there default and when did it start? This sets the accrual clock.
Is the rate/penalty unconscionable? Prepare jurisprudence showing courts trimming >3%/month and similarly steep charges.
Are you double-counting compensatory interest and penalty? Clarify intent; courts avoid duplicative recoveries.
Post-judgment: Apply 6% on the total adjudged amount (principal + pre-judgment interest, if any), until fully paid.
Capitalization: Was it expressly agreed? Is it reasonable?

9) Computation quick guide

A. Simple interest (typical unless compounding is agreed)

Interest = Principal × Rate (per year) × (Number of days / 365)

For legal interest at 6%: Example: ₱1,000,000 in delay for 200 days → Interest = 1,000,000 × 0.06 × (200/365) ≈ ₱32,877

B. Converting “per month” to annual

A quoted X% per month (simple, non-compounded) ≈ 12 × X% per annum.
If compounded monthly, effective annual rate (EAR) is:

EAR = (1 + monthly_rate)^{12} − 1

Courts focus on effective burden when testing unconscionability.

10) Compliance & consumer-protection overlay

Truth in Lending Act (RA 3765): Lenders must clearly disclose the finance charge and effective cost of credit. Non-disclosure risks administrative liability and helps a borrower’s defense.
Data privacy, collection practices, and harassment rules also apply to digital lending and collections. Regulatory enforcement can void abusive fee stacks or practices even if the nominal interest seems acceptable.

11) Practical scenarios

Contract says “interest at market rates” only. – Too vague. Without a definite, written rate or determinable formula, courts may refuse conventional interest and resort to 6% as damages from default.
5% per month + 5% penalty per month + monthly compounding. – High risk of being unconscionable. Expect judicial reduction and substitution with 6% (or a trimmed figure), plus disallowance of stacking.
No written interest; borrower delayed 1 year; judgment issued. – 6% from default/demand to judgment; 6% post-judgment until full payment.
Capitalization clause (quarterly) in a bank loan. – Generally enforceable if express, clear, and not oppressive. But courts can curb the result if it becomes punitive.

12) Key takeaways

Write it down: No written stipulation, no conventional interest (Art. 1956).
6% per annum is the legal interest for (i) loans/forbearance when courts must fix interest as damages and (ii) all monetary judgments, from July 1, 2013 onward.
Unconscionable rates (often those at several percent per month) are voidable or reducible.
Post-judgment interest is uniformly 6% until full satisfaction.
Compounding and penalties must be express and reasonable.
Sector-specific rules (e.g., consumer credit) can impose caps and disclosures—check the current product-specific regulations.

13) Model clauses (illustrative only; tailor to your facts)

Conventional Interest. “The Loan shall bear interest at [__]% per annum, computed on a 365-day year, accruing from [date] until the earlier of full payment or acceleration.”

Default Interest. “Upon an Event of Default, the unpaid principal and accrued interest shall bear default interest at [__]% per annum from the date of default until paid, without prejudice to other remedies.”

Capitalization (if desired). “Accrued but unpaid interest shall be capitalized quarterly and thereafter earn interest at the same rate. Capitalization shall apply only to interest already due and unpaid.”

Penalty (alternative to default interest). “If Borrower fails to pay any amount when due, Borrower shall pay a late payment penalty of [__]% of the overdue amount per month, which the parties agree is a reasonable pre-estimate of damages and is in lieu of [or in addition to] moratory interest.”

Post-Judgment Interest Acknowledgment. “The parties acknowledge that, under Philippine law, any monetary judgment shall earn 6% per annum from finality of judgment until full satisfaction.”

Final note

This article synthesizes core rules and prevailing doctrine. For a specific loan or dispute—especially where sectoral caps or consumer-credit rules might apply—have counsel review the precise product terms, notices of default, and the computation worksheets against the 6% legal-interest framework and the unconscionability line of cases.