VESTED INTERESTS (Loans and Interest Rates)

By Obiter07

This is the bane of all borrowers everywhere, the amount of interest that is charged on their loans. But be advised that no interest is due unless expressly stipulated in writing.[1] So if it is not written down, you don’t have to pay it.

Ordinarily, the parties are free to stipulate on the rate of interest with respect to any loan or forbearance (read: delay in the collection) of any money, goods or credits, as there is no longer any limit on interest with the repeal of the Usury Law. This statute previously capped the maximum rate for loans secured with real estate mortgage at 12% per annum (SPOUSES BAUTISTA vs. PILAR DEVELOPMENT CORPORATION, [G.R. No. 135046. August 17, 1999]). And anything beyond that is “usury.” But that is no longer a legal term which we can use. It has been replaced by another word.

One would then think that any lender or 5/6 operator would now be free to impose whatever interest they might see fit. They can, but the validity of stipulations on interest may still be questioned before the courts and invalidated if it is “unconscionable” (read: unfair), the new term which we can now use. As held in Medel, et al. vs. Court of Appeals, et al.,[G.R. No. 131622. November 27, 1998.]:

“We agree with the petitioners that stipulated rate of interest at 5.5 %, per month on the PHP500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we cannot consider the rate as ‘usurious’ because this Court has consistently held the Circular No. 905 of the Central Bank xxx has expressly removed the interest ceiling prescribed by the Usury law and that the Usury Law is now legally inexistent. xxx Nevertheless, we find the interest at 5.5%, per month or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals xxx if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.”

A similar ruling was made by the Supreme Court in DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS, et al. [G.R. No. 137557. October 30, 2000] where it found to be unconscionable an annual interest rate of 18% per annum and ordered the same reduced to 10%. Creditors would be well advised to take note of these decisions. This is a subjective test but it is something that borrowers will take anytime.

Loans, or Forbearance of Money

Please remember that if your agreement does not expressly provide for interest and it concerns a loan or a forbearance of money, then the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under, and subject to, the provisions of Article 1169 of the Civil Code (EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS, et al. [G.R. No. 97412. July 12, 1994.]).

“ARTICLE 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. [N. B. The Monetary Board increased the rate of legal interest from six percent (6%) to twelve percent (12%) per annum (Please see SEMPIO, et al. vs. COURT OF APPEALS, et al. [G.R. No. 115953. October 28, 1996.])”

Need for Demand

Demand is not always necessary before a party is considered in delay.

“ARTICLE 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to he delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.”

Other obligations

If it concerns some other obligation other than the payment of a sum of money, and there is no stipulation as to interest, the rate of interest shall be 6% per annum from the date of judicial or extrajudicial demand.[2]

Fixed or Floating

Please make sure you can handle the type of interest that you sign up for. It may be fixed or floating. Fixed means that it is determined at the outset and does not change. But the rates may also be referenced to commercial reference rate such as LIBOR (London Interbank Offered Rate which is a daily reference rate). It can thus fluctuate and you may be in for more than you bargained for.

Simple or Compounded

And you should see whether the interest is simple or compounded. In the absence of stipulation, interest due shall not earn interest except only from the date of judicial demand or the filing of a complaint.

“Neither is petitioner entitled to compounded or accumulated interest. There was no agreement regarding this either in the compromise agreement or in the deed of second mortgage. The law clearly provides that interest due and unpaid shall not earn interest, unless the contracting parties stipulate to capitalize the interest due and unpaid, which as added to the principal, shall earn new interest. MANUFACTURER’S BUILDING, INC. vs. COURT OF APPEALS, et al. [G. R. No. 116847. March 16, 2001.]).”

“The Supreme Court agrees with the modification made by the appellate court in ordering payment of legal interest from the date judicial demand was made by Pilot Samson against Philippine Air Lines with the filing of the complaint in the lower court and affirms the ruling of respondent court which reads: “Articles 1169, 2209 and 2212 of the Civil Code govern when interest shall be computed. Thereunder interest begins to accrue upon demand, extrajudicial or judicial. A complaint is a judicial demand (Cabarroguis vs. Vicente, 107 Phil. 340). Under Article 2212 of the Civil Code, interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” (CA Resolution pp. 153-154, Records) PHILIPPINE AIR LINES, INC. vs. THE COURT OF APPEALS, et al. [G.R. No. L-46558. July 31, 1981.]“

When payable

And you can agree on when the interest is payable. It can be made to fall due in advance, upon certain designated periods during the lifetime of the contract, or on the same date when the principal is repaid. You can negotiate based on your own capacity to pay.

Receipt (of Principal)

As a borrower, you can try and make the creditor receive the principal amount without paying the interest. The receipt of the principal without reservation as to interest may work against the creditor:

“ARTICLE 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. xxx”

When you find yourself needing a loan, it may be hard enough having to pay the principal. So keep in mind how much interest you may also have to pay on top of it.

[1] ARTICLE 1956, New Civil Code.

[2] II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
2. When a obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) 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 court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount of finally adjudged. EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS, et al. [G.R. No. 97412. July 12, 1994.]

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