What are "Interests" ba?

Understanding “Interest” in the Philippines.

Imagine you borrow ₱100,000 from a friend or a bank. Sometimes you have to pay extra on top of that ₱100,000. That extra amount is called interest.

In plain language:

Interest is the additional money paid on top of the principal (the original amount owed). It exists for two reasons:

1. You and the lender agreed that money has a “price” (this is called contractual/monetary interest), or

2. You were late in paying, and the law treats that delay as damage to the lender (this is called compensatory interest or interest as damages).

The Supreme Court explained it clearly in Park v. Choi (G.R. No. 220826, 27 MARCH 2019):

“There are two types of interest — monetary interest and compensatory interest… Right to interest therefore arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.”

Here are the common kinds of interest you will see in everyday loans, contracts, and court cases:

1. Monetary Interest (also called Conventional Interest)

This is the “regular” interest written in your loan agreement. For example, “12% per annum” or “3% per month.”

General Rule: You can only collect this kind of interest if it is clearly agreed upon in writing. No written agreement = no monetary interest.

Courts allow you to agree on any rate, but if the rate is too high, shocking, or unfair (iniquitous, unconscionable, or exorbitant), the judge can reduce it and replace it with the legal rate that was in effect when the contract was signed. In the case of Sps. Castro v. Tan et al.(G.R. No. 168940, November 24, 2009), the Supreme Court described unconscionable rate of interest on a money debt:

“The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.”

2. Compensatory Interest (Legal Interest / Interest as Damages)

Even if your contract has no interest rate at all, once the debtor is late (in delay), the creditor can still collect interest as compensation for the damage caused by the delay.

As the Supreme Court said in Park v. Choi:

“Nevertheless, the moment a debtor incurs in delay in the payment of a sum of money, the creditor is entitled to the payment of interest as indemnity for damages arising out of that delay.”

This is the interest the law automatically gives when there is no valid written agreement on monetary interest.

3. Penalty Interest

Many loan contracts (especially from banks) add an extra “penalty interest” or “late payment penalty” on top of the regular interest if you miss a payment.

The Supreme Court in Goldwell Properties Tagaytay, Inc. v. Metrobank(G.R. No. 209837, 12 May 2021) treats this as part of compensatory interest. Judges can also reduce the penalty if it is too harsh or unreasonable:

“A penalty interest is sanctioned by Article 2229 of the Civil Code which states:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.”

4. Interest on Interest (Compounding)

Adding interest on top of unpaid interest (compounding) is generally not allowed unless the contract or the final court judgment clearly says so.

Interest Rate vs. “Legal Interest” — What’s the Difference?

• Interest rate = the percentage and time period you actually wrote in the contract (e.g., 10% per annum).

• Legal interest = the rate the law supplies when:

  1. There was no written agreement on interest, or

  2. The agreed rate was struck down as too high, or

  3. You are claiming damages for delay.

In recent cases, the legal rate is 6% per annum.

Note: If the contract is in writing and says “interest is due” but does not state the exact rate, the court will apply the legal rate (6%) that was prevailing when the contract was signed.

Why Must the Contract Be in Writing?

Article 1956 of the Civil Code is very clear:

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

The Supreme Court in the case of Siga-an v. Villanueva (G.R. No. 173227, 20 January 2009) has repeated this rule many times:

“Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. ”

And in Park v. Choi:

“Inasmuch as the parties did not execute a written loan agreement… Article 1956… operates to preclude the imposition and running of monetary interest on the principal.”

Why does the law insist on writing?

Because interest can make your debt grow very big. The law wants clear proof that you really agreed to pay it. Oral promises (“basta ganito ang interest ah”) are not enough for monetary interest.

What Happens If the Loan Agreement Is Only Oral?

Debtor is not obliged to give monetary interest.

Even if the lender can prove the loan exists, he can only recover:

• The principal, plus

• Compensatory/legal interest (6%) only from the time of delay (usually after a formal demand is made), not from the very first day.

Under the Philippine Civil Law, monetary interest (the extra “price” of money) requires a clear written agreement. Without it, only compensatory interest (6% legal rate as damages for delay) can be collected once you are late.

This rule protects ordinary borrowers from hidden or forgotten interest charges. Always put your loan agreements, especially the interest rate, in writing. It saves headaches, court cases, and money in the long run.

If you have a loan issue and are not sure whether your interest is valid, drop us an email or contact us.

Disclaimer: This article was assisted by AI and may contain inaccuracies; it is not legal advice nor a substitute for professional counsel.