DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

Interest is of two major kinds – conventional interest and compensatory interest (LARA’S GIFTS v. MIDTOWN INDUSTRIAL SALES, GR No. 225433, Sep 20, 2022, En Banc Resolution). 

Conventional interest (or the agreed monetary interest) represents cost for the use of money in a contract of loan (or forbearance of money, goods, or credit) while compensatory interest (also called penalty interest) represents, as a matter of law, indemnity for damages arising from delay in the obligation consisting in the payment of a sum of money. Following the definitions, conventional interest may only be collected in a contract of loan (or forbearance of money, goods, or credit) while compensatory interest may only be collected when the debtor incurs delay in any obligation consisting in the payment of a sum of money. 

Since a contract of loan is an obligation consisting in the payment of a sum of money, a compensatory interest may also be collected other than the conventional interest when there is delay in the payment of the principal or monetary interest.  If one fails to pay on due date, is he already considered in delay liable to pay compensatory interest? The answer is “no” pursuant to Article 1169 of the Civil Code, “no demand, no delay”, except when there is a stipulation in the contract of loan that “demand to pay is not necessary”.

How about payment of conventional interest? In a contract of loan (or forbearance of money, goods, or credit), one is obliged to pay the monetary interest only if the following requisites are present (Article 1956 of the Civil Code):

1. There is an express stipulation to pay interest.
2. The express stipulation to pay interest is in writing.

Hence, following the above requisites, one is not obliged to pay monetary interest if there is no agreement to pay or if there is an agreement, such agreement to pay monetary interest is not reduced in writing.

Further, If the agreed interest rate in writing (be it for monetary or compensatory interest) is excessive, iniquitous, unconscionable or exorbitant, the interest due is not the agreed interest but only the legal interest.  At present, the legal interest in the Philippines is 6% per annum. Note that only the court has the power to declare whether an interest is excessive, iniquitous, unconscionable or exorbitant.

Do you have existing loan? Check now if your agreement to pay monetary interest is in writing.  Otherwise, you have the right to demand that all previous and succeeding payments be applied against the principal amount.

May 31, 2025