Debt-financing is usually one of the ways of maximizing investment opportunities. Thus, for businessmen, resort to borrowings—whether from a private party or the bank—is a viable option.

 

In a less formal borrowing set-up, like an individual person borrowing from a close friend or neighbor, for instance, the payment of interest is not usually agreed upon whether orally or in writing. Probably, it is because the amount borrowed is promised to be returned immediately. It is all good until the borrower breaks their promise of immediate payment. What then is the remedy of the lender? Can the lender impose upon the borrower the payment of interest in case the latter does not pay upon demand, despite the absence of a written agreement to the same?

 

This article will discuss about when lenders can legally demand interest payments, and if the interest is demandable, how to compute the same. Moreover, the difference between the two concepts of interest, i.e., monetary and compensatory will be discussed as well.

 

The concept of interest—monetary v. compensatory

           

To better grasp the demandability of interest payment, it is important to first classify interest into monetary and compensatory.

 

In Decena v. Asset Pool A (SPV-AMC), Inc., G.R. No. 239418 (2020), the Supreme Court explained:

 

There are two types of interest, namely: (1) monetary interest, which is the compensation fixed by the parties for the use or forbearance of money; and (2) compensatory interest, which is that imposed by law or by the courts as penalty or indemnity for damages. Accordingly, the right to recover interest rates arises either by virtue of a contract or monetary interest, or as damages for delay or failure to pay the principal loan which is demanded or compensatory interest. (Citation omitted.)

 

Thus, monetary interest is the interest that the borrower pays for the use of the lender’s money. On the other hand, compensatory interest, generally, is the interest paid when the borrower incurs in delay in the payment of an obligation.

 

When is interest legally demandable?

 

The Civil Code (Article 1956) is clear, “No interest shall be due unless it has been expressly stipulated in writing.”  Therefore, in a contract of loan, any agreed upon interest between the parties must be in writing, otherwise, the same is not valid. Moreover, even as the parties can freely stipulate in writing the agreed interest rate, the same may not be excessive or iniquitous, otherwise, the same will be void. However, in various cases, where the interest rate stipulated is excessive, the Court instead imposed the legal rate of interest which is at 6% per annum, starting 1 July 2013 per BSP Circular No. 799. Note that prior to 1 July 2013, the legal rate of interest was at 12% per annum.

 

In Decena, the Court explained, “when the parties' stipulated interest rate is struck down for being excessive and unconscionable, the unconscionable interest rate is nullified and deemed not written in the contract. [I]n cases where the interest rate is struck down as unconscionable the legal rate of interest prevailing at the time the agreement was entered into will be applied by the Court.” Citing Isla v. Estorga, G.R. No. 233974 (2018), the Court continued:

 

It is well to clarify that only the unconscionable interest rate is nullified and deemed not written in the contract; whereas the parties' agreement on the payment of interest on the principal loan obligation subsists. It is as if the parties failed to specify the interest rate to be imposed on the principal amount, in which case the legal rate of interest prevailing at the time the agreement was entered into is applied by the Court. This is because, according to jurisprudence, the legal rate of interest is the presumptive reasonable compensation for borrowed money. (Citation omitted.)

 

Note however, that the interest referred to herein is the monetary interest, and not the compensatory interest, the latter being governed by Arts. 2209 – 2213 which provide:

 

Art. 2209. 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.

 

Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.

 

Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court.

 

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

 

Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.

 

The compensatory interest referred to in Art. 2209 is mandatory upon the court. Once the debtor incurs in delay, i.e., debtor’s inability to pay despite a valid demand, the creditor then becomes legally entitled to compensatory interest, regardless of whether there is a stipulation to the same. On the other hand, the award of interest per Arts. 2210 and 2211 is merely discretionary upon the court.

 

To summarize, for monetary interest to be legally demandable, the same must be in writing, and at the same time, must be reasonable and not excessive as to be regarded as contrary to public policy. On the other hand, for compensatory interest, the same is mandatory as soon as the debtor incurs in delay, or discretionary upon the court in case of breach of contract or in obligations arising from crimes and quasi-delicts.

 

How to compute interest payments?

 

1. Monetary Interest

 

The computation of monetary interest payments depends on whether the interest is simple or compound. Simple interest is computed with the principal loan amount as the basis for the computation of interest payment, as compared with compound interest which uses the principal loan amount plus accrued interest as the basis.

 

Under Art. 1959 of the Civil Code, “Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.”

 

The Court in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433 (2019) explains when is the interest simple and when it is compound, thus: “[T]here should be no compounding of interest, whether stipulated or legal, unless compounding is expressly agreed upon in writing by the parties or mandated by law or regulation. [x x x] Being more burdensome than simple interest, compounded interest must be expressly stipulated by the parties or mandated by law or regulation.” (Citations and Emphasis omitted.)

 

Thus, unless otherwise provided, the rule is that the computation of interest must be simple. To illustrate, if on 1 January 2023, Mr. D borrowed PHP 200,000.00 from Mr. C payable on 1 January 2025, and agreed upon a 6% interest per annum in writing, then, on due date, upon demand, Mr. C is entitled to a PHP 24,000.00 interest payment, in addition to the PHP 200,000.00 principal amount loaned, computed as: (Interest = Principal x Rate x Time = PHP 200,000.00 x 6% x 2 years).  On the other hand, given the same facts, but instead of simple interest, the parties agreed in writing to a compound interest of 6% compounded annually for 2 years, then, on 1 January 2025, Mr. C is entitled to a PHP 24,720.00 interest payment, in addition to the PHP 200,000.00 principal amount loaned, computed as:

 

Date	Principal (+ Interest) (A)	Rate   (B)	Time   (C)	Interest   (A x B x C)
1 January 2023	PHP 200,000.00	6%	1 (compounded annually)	PHP 12,000.00
1 January 2024	212,000.00	6%	1	12,720.00
1 January 2025	224, 720.00		Total	PHP 24, 720.00

 

2. Compensatory Interest

 

Basically, the computation of compensatory interest is the same as the manner of computation of monetary interest. However, the time to be considered herein is the time when the borrower incurs in delay, i.e., starting from the time the debtor fails to pay the amount due and demandable upon a valid demand, until the same is fully paid, based on the principle of “No demand, no delay.”

 

Article 2212 of the Civil Code provides, “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.”

 

Thus, interest due earns interest (compound interest) when:

 

1. There is written stipulation to capitalize the interest due and unpaid (Art. 1959); or
2. There is already a judicial demand, although the obligation may be silent upon this point (Art. 2212).

 

Guidelines on interest payments

 

            The most recent guidelines with regard to interest payments is discussed by the Court in Lara's Gifts & Decors, Inc. as follows:

 

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e, a loan or forbearance of money, goods, credits or judgments, the interest due shall be that which is stipulated by the parties in writing, provided it is not excessive and unconscionable, which, in the absence of a stipulated reckoning date, shall be computed from default, i.e., from extrajudicial or judicial demand in accordance with Article 1169 of the Civil Code, UNTIL FULL PAYMENT, without compounding any interest unless compounded interest is expressly stipulated by the parties, by law or regulation. Interest due on the principal amount accruing as of judicial demand shall SEPARATELY earn legal interest at the prevailing rate prescribed by the Bangko Sentral ng Pilipinas, from the time of judicial demand UNTIL FULL PAYMENT.

 

2. In the absence of stipulated interest, in a loan or forbearance of money, goods, credits or judgments, the rate of interest on the principal amount shall be the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas, which shall be computed from default, i.e., from extrajudicial or judicial demand in accordance with Article 1169 of the Civil Code, UNTIL FULL PAYMENT, without compounding any interest unless compounded interest is expressly stipulated by law or regulation. Interest due on the principal amount accruing as of judicial demand shall SEPARATELY earn legal interest at the prevailing rate prescribed by the Bangko Sentral ng Pilipinas, from the time of judicial demand UNTIL FULL PAYMENT. 

 

3. When the obligation, not constituting a loan or forbearance of money, goods, credits or judgments, is breached, an interest on the amount of damages awarded may be imposed in the discretion of the court at the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas, pursuant to Articles 2210 and 2011 of the Civil Code. No interest, however, shall be adjudged on unliquidated claims or damages until the demand can be established with reasonable certainty. Accordingly, where the amount of the claim or damages is established with reasonable certainty, the prevailing legal interest shall begin to run from the time the claim is made extrajudicially or judicially (Art. 1169, Civil Code) UNTIL FULL PAYMENT, but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of the judgment of the trial court (at which time the quantification of damages may be deemed to have been reasonably ascertained) UNTIL FULL PAYMENT. The actual base for the computation of the interest shall, in any case, be on the principal amount finally adjudged, without compounding any interest unless compounded interest is expressly stipulated by law or regulation. (Citations omitted.)

 

The previous discussions dealt with interest payment on loans. Nonetheless, the computations therein may be equally applied to interest payment with regard to forbearance of money, goods, services, and even judgments. At this point, it is equally important to understand the concept of forbearance of money, goods, credits, or judgments.

 

The concept of forbearance of money, goods, credits, or judgments

 

In Lara's Gifts & Decors, Inc., the Court explained the concept of forbearance, thus:

 

The term "forbearance" in the context of the Usury Law has been defined as a contractual obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable. In consideration of this forbearance, the parties often agree on the payment of interest on the amount due. [x x x] [F]orbearance of money, goods or credits has a separate meaning from a loan—[the former] refers to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions. Forbearance of goods includes the sale of goods on installment, requiring periodic payment of money to the creditor. Forbearance of credits includes the sale of anything on credit, where the full amount due can be paid at a date after the sale. (Citations omitted.)

 

Further, the Court explained, “the general rule is that the interest stipulated by the parties shall apply, provided it is not excessive and unconscionable. Absent any stipulation, the Court has consistently held that the prevailing legal interest prescribed by the Bangko Sentral ng Pilipinas [which is 6% per annum starting 1 July 2013, and 12% per annum prior thereto] applies to loans or forbearance of money, goods or credits, as well as to judgments.”

 

 

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