Cost of debt 3

As a general rule, there is no interest if there is no written agreement for the same. Hence, informal loans that usually impose exorbitant, sky-high interests which are not in writing, but nonetheless succeed in burying an unsuspecting debtor in debt consisting of, mostly, unpaid interest. Yet such interest is unenforceable for lack of a written agreement.

This does not mean, however, that there can be no interest imposed upon a monetary obligation in the absence of a written agreement for payment of such interest. Pursuant to Article 2209 of the Civil Code, when the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. If there is no stipulation the legal interest, which is 6 percent per annum, shall apply. This is what is known as compensatory interest which is imposed against the borrower by reason of his default.

Under Article 2210 of the Civil Code, interest may also be allowed on damages awarded for breach of contract.

Apart from this, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6 percent per annum to be computed from default, i.e., from judicial or extrajudicial demand.

The Monetary Board lowered such legal or default interest from 12 percent to 6 percent per annum for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, starting 1 July 2013 under BSP Circular 799. Under the same Circular, the 6 percent legal rate of interest is also uniformly applied to non-loan obligations.

The Supreme Court has ruled that a contract’s silence on a specific rate of interest kicks in the application of the prevailing legal rate of interest as the cost for borrowing money. The law treats the prevailing legal rate as a surrogate for the parties’ intent, as expressed as of the time of the execution of their contract. This rate is deemed to persist regardless of shifts in the legal rate of interest.

As applied, if no interest is stipulated by the parties, a debtor is liable for the payment of said 6 percent legal interest per annum to be computed from the date of receipt of the demand letter. Further, from the finality of a court decision adverse to such debtor and until the full amount is paid, the amount due from the debtor shall earn interest at 6 percent per annum.

This is because the interim period is deemed equivalent to a forbearance of credit.

Nonetheless, with regard to those judgments that have become final and executory prior to 1 July 2013, the rate of interest fixed therein shall be applied. Otherwise, 12 percent rate of interest shall be applied.

At the end of the day, whether interest is stipulated or not, the courts are empowered to ensure that loan transactions are not made a vehicle for predatory gain. Viewed in that aspect, the courts are merely implementing a rule expected by law and society from civilized creditors — to prevent unduly profiting and unjustly enriching himself at the expense of another.