Article 1956 of the Civil Code: Interest must be agreed in writing
Status: In force
What does Article 1956 say?
No interest shall be due unless it has been expressly stipulated in writing.
What does it mean in plain language?
Article 1956 of the Civil Code says no interest is due on a loan unless it was "expressly stipulated in writing". A rate agreed only by word of mouth cannot be collected as interest. But a borrower who is late after a demand can still owe interest as damages for the delay, at the legal rate set by the Bangko Sentral ng Pilipinas, which the Supreme Court said in 2022 is 6% a year.
A loan does not earn interest by default. Article 1933 says a simple loan "may be gratuitous or with a stipulation to pay interest." Article 1956 adds the form: if the parties want interest, they must say so expressly and in writing.
How does it work in real life?
Rodel's verbal 10%
Rodel lends ₱30,000 to his cousin. They agree by word of mouth on "10% interest". Nothing about interest is written. Under Article 1956, the 10% is not due. If the cousin does not pay on time and Rodel sends a written demand, the cousin may owe compensatory interest at the legal rate from the demand, as damages for the delay.
Liza's note with no interest
Liza lends ₱40,000 to Noel. Noel signs a note: "I will pay Liza ₱40,000 on May 15." No interest is mentioned. Noel does not pay, and Liza sends a written demand on June 15. No monetary interest was agreed, so none is due for the period before the demand. From June 15, Noel may owe compensatory interest at the legal rate. At the 6% a year that the Court called current in 2022, that would be ₱2,400 for each year of delay.
Carmela's receipt "with interest"
Carmela borrows money from her aunt and signs a receipt saying she will pay in one year "with interest". No rate is stated. Interest was stipulated in writing, so it is due. Following Abella, the legal rate at the time the receipt was signed applies.
These are made-up examples to show how the rule works. They are not advice for any real case.
What does this mean in practice?
- If interest is part of the deal, Article 1956 requires the interest to be agreed in writing. A clear written note usually states the rate, how often it is charged (monthly or yearly) and whether it is compounded.
- Keep a copy of the written demand. It usually marks the start of compensatory interest (Article 1169).
- A case to collect on a written loan has ten years (Article 1144); on an oral loan, six years (Article 1145).
- For verbal loans in general, see is a verbal agreement binding? and is a promissory note valid without a notary?
- For free or low-cost legal help, see where to find legal help.
What does Article 1956 say?
No interest shall be due unless it has been expressly stipulated in writing.
Two conditions must both be met for agreed interest to be due:
- Express. The parties clearly agreed that interest will be paid.
- In writing. The agreement on interest is in a written document, such as the loan contract, a promissory note or a signed receipt.
The rest of the loan does not need to be written for the loan to bind (Article 1356). Article 1956 is about the interest only.
Is there still interest if the borrower pays late?
Yes, possibly, but it is a different kind of interest. The Supreme Court separates two kinds:
- Conventional interest (in a loan of money, also called monetary interest). The cost of using the money, agreed by the parties. This is what Article 1956 covers. In Lara's Gifts v. Midtown (2022 Resolution), the Court said it is allowed only if there is an express stipulation for interest and the stipulation is in writing.
- Compensatory interest. Damages for delay in paying a sum of money. In the same Resolution, the Court said compensatory interest, "unlike conventional interest, need not be expressly stipulated in writing".
For loans, the 2022 Resolution says that when no penalty rate and no conventional rate were stipulated in writing, or when those rates are unconscionable, the compensatory interest is the legal rate prescribed by the Bangko Sentral ng Pilipinas, counted from default until full payment. Default usually starts with a judicial or extrajudicial demand (Civil Code Article 1169).
How much is the legal interest?
In Nacar v. Gallery Frames (2013), the Supreme Court applied BSP Circular No. 799. From July 1, 2013, the legal rate for loans or forbearance of money, when no rate was expressly agreed, became 6% a year. The old 12% rate applies only until June 30, 2013. In the 2022 Lara's Gifts Resolution, the Court said: "In contracts of simple loan of money, the legal interest rate is currently 6%."
For more on the rate, see what is the legal interest rate in the Philippines? and legal interest.
What if the note says "with interest" but no rate?
Then interest was stipulated in writing, and only the rate is missing. In Spouses Abella v. Spouses Abella (2015), the receipt said the money was payable in one year "with interest", with no rate. The Supreme Court applied the legal rate. It also said that when the legal rate is used this way, it is the legal rate at the time the agreement was made, and it does not shift later.
In short, the Court said Article 1956 allows only the rate the parties wrote in their loan document or, if they wrote none, the legal rate.
Can interest be added to interest?
Not freely. Article 1959 says interest due and unpaid "shall not earn interest", unless the parties agree to capitalize it. Article 2212 makes an exception: interest due earns legal interest from the time it is judicially demanded. In Lara's Gifts (2019), the Court added that there should be no compounding of interest unless the parties expressly agree to it in writing or a law or regulation requires it.
A very high written rate can also be cut down by a court. See is 5% monthly interest legal?
Which Supreme Court rulings are relevant?
- Nacar v. Gallery Frames (G.R. No. 189871)Nacar v. Gallery Frames explained: the 2013 ruling that cut legal interest from 12% to 6% a year from July 1, 2013, and the rules on when it runs.
- Lara's Gifts v. Midtown (G.R. No. 225433)Lara's Gifts v. Midtown explained: the 2019 and 2022 rulings on agreed interest, compounding, unconscionable rates and the 6% legal interest rate.
Frequently asked questions
Is verbal interest on a loan collectible in the Philippines?
Not as agreed interest. Article 1956 of the Civil Code says no interest shall be due unless it has been expressly stipulated in writing. A rate agreed only by word of mouth cannot be collected as interest.
Can a lender still get interest if nothing was written?
Only as damages for delay. In Lara's Gifts v. Midtown (2022), the Supreme Court explained that compensatory interest, unlike agreed interest, need not be stipulated in writing. If the borrower is late after a demand, the legal rate set by the Bangko Sentral ng Pilipinas applies from the demand.
What if the note says 'with interest' but gives no rate?
Interest was stipulated in writing, so it is due. In Spouses Abella v. Spouses Abella (2015), the Supreme Court said the legal rate applies in that case, and that it is the legal rate at the time the agreement was made.
What is the legal interest rate on a loan?
In Nacar v. Gallery Frames (2013), the Supreme Court applied BSP Circular No. 799: from July 1, 2013, the legal rate for loans and forbearance of money without an agreed rate became 6% a year. In Lara's Gifts (2022), the Court said the legal interest rate for simple loans of money is currently 6%.
Can unpaid interest earn more interest?
Only in limited cases. Article 1959 says interest due and unpaid does not earn interest unless the parties agree to capitalize it. Article 2212 adds that interest due earns legal interest from the time it is judicially demanded.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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