In Philippine commerce, many credit transactions occur over a handshake or a casual conversation. While Filipinos often rely on palabra de honor (word of honor), legal complications arise when the borrower fails to pay. A common misconception is that a loan is not legally binding unless it is written. Under Philippine law, this is not entirely accurate, though enforcing a verbal agreement presents unique hurdles.

1. The General Rule: Consensual Contracts

Under Article 1315 of the Civil Code of the Philippines, contracts are perfected by mere consent. A loan (simple loan or mutuum) is a contract where one party delivers to another money or any other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid.

Validity: A verbal loan agreement is legally binding and valid the moment the parties agree on the amount and the obligation to repay, and the money is delivered.
Formality: Generally, no specific form (writing, notarization) is required for the existence of a contract, provided the essential elements are present: consent, object certain, and cause/consideration.

2. The Critical Exception: Interest Rates

While the loan itself can be verbal, the agreement to pay interest cannot.

According to Article 1956 of the Civil Code:

"No interest shall be due unless it has been expressly stipulated in writing."

If you lend someone ₱50,000 verbally and agree on a 5% monthly interest rate, the law considers the interest void. You can legally recover the ₱50,000 principal, but the borrower is not legally obligated to pay the interest because it was not documented in writing.

3. The Statute of Frauds

The Statute of Frauds (Article 1403, paragraph 2 of the Civil Code) requires certain agreements to be in writing to be enforceable in court.

Loans over ₱500: Interestingly, while the Civil Code mentions that contracts involving amounts exceeding ₱500 must appear in writing (Article 1358), the Supreme Court has clarified that this is for convenience only, not for validity.
Enforceability: A verbal loan for a large sum is still valid, but if the debtor denies the debt in court, the creditor cannot prove it through mere testimony unless there is "partial performance" (e.g., the borrower already paid back a small portion of the loan, which proves the agreement existed).

4. Burden of Proof and Evidence

The primary challenge of verbal loans is not legality, but evidence. In legal proceedings, the burden of proof lies with the creditor. To enforce a verbal loan, you may use:

A. Partial Performance

If the borrower has made even a single installment payment, this "partial performance" takes the contract out of the Statute of Frauds. Bank transfer receipts, GCash records, or acknowledgment of a partial payment serve as strong evidence.

B. Confessions/Admissions

Screenshots of text messages, Viber threads, or Facebook Messenger chats where the borrower acknowledges the debt ("I will pay next week," or "I'm sorry I can't pay the ₱10k yet") are admissible as electronic evidence under the Rules on Electronic Evidence.

C. Witness Testimony

Third parties who were present when the money changed hands or when the agreement was made can testify. However, Philippine courts treat purely oral testimony with caution unless corroborated by other facts.

5. Prescription: The Time Limit

You cannot wait forever to collect. Under Article 1145 of the Civil Code, an action upon an oral contract must be commenced within six (6) years from the time the right of action accrues (usually the date the payment was due). If you fail to sue or demand payment within this period, the debt becomes a "natural obligation," meaning you can no longer legally compel payment through the courts.

6. Small Claims Court: The Practical Venue

For verbal loans not exceeding ₱1,000,000 (excluding interest and costs), the most efficient way to enforce the agreement is through a Small Claims Action in the Metropolitan or Municipal Trial Courts.

No Lawyers: You do not need a lawyer; in fact, lawyers are generally prohibited from appearing at the hearing.
Evidence: You simply fill out a "Statement of Claim" and attach your evidence (texts, witness affidavits, etc.).
Barangay Conciliation: Before filing, you must generally undergo Barangay Conciliation (if you live in the same city/municipality) to attempt a settlement.

Summary Table

Feature	Verbal Agreement Status	Requirement/Limit
Principal Loan	Valid & Binding	Must prove delivery of money.
Interest	Unenforceable	Must be in writing (Art. 1956).
Validity Period	6 Years	Statute of Limitations for oral contracts.
Electronic Proof	Admissible	Texts, emails, and chat logs count.
Legal Venue	Small Claims Court	For amounts up to ₱1 Million.