I borrowed money from an acquaintance evidenced by a promissory note where I promised to pay him within one year with 3% interest a month. Now, two years after I borrowed the money, I offered to pay him the full amount with interest, but he refused to accept my payment. He said it was not enough and insisted on a larger sum claiming that the interest on my loan should be compounded because I failed to pay him on time. Is his demand legal?
The general rule concerning computation of interest is stated in the first sentence of Article 1959 of the Civil Code which states that “interest due and unpaid shall not earn interest”. This rule applies to simple interest which means that the interest would only accrue on unpaid principal. There are two exceptions to this rule wherein compound interest is applied instead of simple interest.
The first exception refers to a case where the parties to a contract agree on compound interest. Our laws give contracting parties wide latitude to lay down the terms and conditions of their contract which is referred to as freedom of contract. This includes compounding of interest. However, it must be established that the parties clearly and voluntarily agreed on compound interest. In your narration, you only mentioned that you signed a promissory note which states that you have to pay your loan “within one year with 3% interest per month”. There is no hint of any talk or agreement on compounding of interest. Hence, we presume that there is none, and in the absence of a clear-cut consensus on compounding of interest, this exception will not apply.
The second exception is expressed in Article 2212 of the Civil Code which states that “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 there is no agreement on compounding of interest, interest will be compounded from the time the obligation is judicially demanded. Judicial demand is made by filing the appropriate action in court to enforce one’s right. Thus, in this case, interest shall be compounded only from the time of filing a case. It appears from your narration that your creditor has not filed a case in court to collect your obligation. He made a verbal demand but this is not enough. Article 2212 clearly requires a judicial demand to initiate compounding of interest.
Based on the foregoing, we are of the opinion that you are only required to pay simple interest on the money you borrowed. If your creditor refuses to accept the amount you are tendering to him, you may consign your payment to the court in order to extinguish your obligation.
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 the foregoing discussion shed light on the matter.