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Legal Interest in the Philippines
When a monetary obligation becomes due and remains unpaid, the creditor is entitled to claim interest on the principal amount. In the Philippines, the default rate for this interest is set by law. Understanding how to calculate this interest is crucial for both creditors seeking payment and debtors understanding their liabilities.
The Legal Interest Rate
The Bangko Sentral ng Pilipinas (BSP), through Monetary Board Circular No. 799, Series of 2013, set the legal interest rate at six percent (6%) per annum. This rate applies when the obligation to pay arises from law, contract, quasi-contract, delict, or quasi-delict. The Supreme Court, in the landmark case of Nacar v. Gallery Frames, affirmed the application of this rate, making it the standard for most monetary claims where no other rate is stipulated or where the stipulated rate is void.
How Legal Interest is Calculated
The calculation follows the principle of simple interest. This means interest is computed only on the original principal amount for the period it remains unpaid. It does not compound (i.e., interest is not charged on previously accrued interest) unless explicitly agreed upon in a contract.
The formula is: Interest = Principal × (Annual Interest Rate / 365) × Number of Days.
- Principal: The original sum of money owed.
- Annual Interest Rate: Either the 6% legal rate or a valid contractual rate.
- Number of Days: The count of days from the day after the debt became due (the due date) up to and including the date of calculation or payment.
Step-by-Step Calculation Example
Imagine a loan of PHP 100,000 that became due on January 1, 2025. The debtor has not paid, and you want to know the total owed as of October 19, 2026. No special interest rate was agreed upon, so the legal rate applies.
- Determine the Applicable Rate: 6% per annum.
- Calculate the Accrual Period: Count the days from January 2, 2025, to October 19, 2026. This is 656 days.
- Compute the Daily Rate: 6% / 365 = 0.01643836% per day.
- Calculate Interest: PHP 100,000 × (6/100/365) × 656 = PHP 10,791.78.
- Total Owed: PHP 100,000 (Principal) + PHP 10,791.78 (Interest) = PHP 110,791.78.
Contractual vs. Legal Interest
Parties are free to agree on an interest rate different from the legal rate in a contract, such as a Promissory Note or Loan Agreement. However, this rate must not be unconscionable or excessive, as it may be deemed void by the courts. If a contractual rate is valid, it supersedes the legal rate for that obligation. If the contract is silent on interest, or if the obligation arises from law (like damages from a court judgment), the 6% legal rate applies automatically.
Next Steps: Formal Demand
After calculating the exact amount owed, the next logical step for a creditor is to make a formal written demand for payment. A Monetary Demand Letter serves this purpose. It clearly states the principal, the accrued interest, the total demand, and a final deadline for payment. Sending such a letter is often a prerequisite for filing a lawsuit and strengthens your legal position by demonstrating a good-faith effort to collect the debt amicably.