Legal Interest: Meaning in Philippine Law
Quick answer
Legal interest is the interest rate the law applies when the parties did not agree on a rate. In the Philippines it is 6% a year, the rate set by BSP Circular No. 799 from July 1, 2013. Before that date, the legal rate for loans and judgments was 12% a year.
Also called: Legal rate of interest
Where does the 6% come from?
BSP Circular No. 799, as quoted by the Supreme Court in Nacar, says the rate for the loan or forbearance of money, goods or credits, and the rate allowed in judgments, is six percent a year "in the absence of an express contract as to such rate of interest". It took effect on July 1, 2013.
In Nacar v. Gallery Frames (2013), the Supreme Court applied the circular. It said the 12% rate applies only until June 30, 2013, and the new 6% rate applies from July 1, 2013. The change works forward only, not backward.
The Civil Code also mentions the rate. Article 2209, from 1949, says that when a debtor is late in paying money and no rate was agreed, the damages are "the legal interest, which is six per cent per annum". But courts used 12% for loans and judgments until mid-2013, so today's 6% is explained by Circular No. 799 and Nacar.
When does legal interest apply?
- No rate in writing. Article 1956 says no interest is due unless expressly agreed in writing. If a debtor is late after a demand, the legal rate is applied as damages for the delay, from the demand until full payment (Lara's Gifts v. Midtown, 2022 Resolution).
- Final judgments. Under Nacar, once a judgment for money becomes final, 6% a year runs from finality until it is paid.
- No compounding, as a rule. In the 2019 Lara's Gifts decision, the Court said "there should be no compounding of interest, whether stipulated or legal, unless compounding is expressly agreed upon in writing by the parties or mandated by law or regulation." One such law is Article 2212 of the Civil Code: interest already due earns legal interest from the time it is judicially demanded.
A rate that the parties did agree in writing generally applies instead, unless a court finds it unconscionable. See Is 5% monthly interest legal?.
Example
Made-up illustration: Ana lends Ben ₱50,000. Their signed note says "payable on March 1" but mentions no interest. Ben does not pay, and Ana sends him a written demand. No interest was agreed in writing, so none is due as interest. But from the demand, the court may add 6% a year as damages for the delay: ₱3,000 a year until Ben pays.
For the full rules, see What is the legal interest rate in the Philippines?. For collecting an unpaid loan, see Can you go to jail for unpaid debt?.
Which provisions use this term?
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
What is the legal interest rate in the Philippines?
Six percent a year, the rate set by BSP Circular No. 799 from July 1, 2013 for loans or forbearance of money and for judgments, when there is no express agreement on the rate. Before that date the rate for these was 12% a year (Nacar v. Gallery Frames, 2013).
Does legal interest apply if we never agreed on interest?
Monetary interest is not due unless agreed in writing (Civil Code Article 1956). But if the debtor is late after a demand, the courts apply the legal rate as damages for the delay, counted from the demand (Nacar; Lara's Gifts, 2022).
Is legal interest compounded?
Not as a rule. In Lara's Gifts & Decors v. Midtown Industrial Sales (2019), the Supreme Court said there is no compounding unless it is expressly agreed upon in writing or mandated by law or regulation. One such law is Civil Code Article 2212: interest already due earns legal interest from the time it is judicially demanded.
Why does Article 2209 of the Civil Code also say six percent?
Article 2209, written in 1949, says six per cent. For years courts applied 12% to loans and judgments instead. Today's 6% rests on BSP Circular No. 799 as applied in Nacar, not on Article 2209 alone.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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