Computing interest due from delinquent debtor

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Persida Acosta

Dear PAO,
I lent money to my officemate. We made a written agreement wherein he agreed to pay the loan in monthly installments with interest. He paid just two installments, leaving the debt unsettled. I am planning to file a complaint against him but I am not sure how I will compute the total amount that he owed me. Should I charge interest only on the principal loan or on his total unpaid debt including the interest on the monthly installments he failed to pay?
Mickey

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Dear Mickey,
The general rule concerning the computation of interest is expressed in Article 1959 of the Civil Code that states, “Interest due and unpaid shall not earn interest.” This provision adopts the simple interest rule, which means that interest will only accrue on the principal loan. As with any rules, however, there are exceptions wherein the compound interest rule is applied, that is, interest will accrue not only on the unpaid principal loan, but also on the interest that should have been paid by the debtor.

The first exception refers to instances wherein the parties expressly agree to compound interest. Article 1306 of the Civil Code guarantees the freedom of parties to stipulate the terms and conditions of their contract. This gives the contracting parties wide latitude to lay down the terms and conditions of their contract, which the State will respect unless they are not contrary to law, morals, good customs, public order or public policy. This includes making contract provisions providing for compound interest. It must be established, however, that the parties clearly agree on compound interest. Otherwise, the general rule prescribing simple interest will apply.

The other exception is expressed in Article 2212 of the same code that states, “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” In this case, even if compound interest is not agreed upon, the interest will be compounded but only from the time the obligation is judicially demanded. Judicial demand is made by filing the appropriate action in court to enforce one’s right.

Applying the foregoing to your case, it is necessary to review your contract with your officemate to determine what type of interest you can charge him. If your contract expressly stipulated compound interest, then you may charge him interest not only on the unpaid principal loan but also on the interest that he failed to pay on time. On the other hand, if your contract is silent on what type of interest to charge, the general rule prescribing simple interest will apply. This means you can only charge interest on the unpaid principal loan. In such a case, you will only be allowed to compound interest from the time that you file a suit against your officemate to collect the money he borrowed from you.

Again, we find it necessary to mention that this opinion is solely based on the facts you have narrated and our appreciation of the same. The opinion may vary when the facts are changed or elaborated.

We hope that we were able to enlighten you on the matter.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to dearpao@manilatimes.net

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