KokzNotes

Notes on Credit Transactions

Steps in Computing Interest

1. Remember that there are 3 types of interests to be computed. These are:
a. Monetary Interest (MI)
b. Compensatory Interest (CI) or Penalty Interest (PI)
c. Interest on Interest (IoI)
2. Remember that all these interests run until Final Judgment (FJ). The only difference is the
base1 and the time when the interest will start to run.
3. For each type of interest, ask the following questions:
a. What base will I use?
b. When will interest start to run?
c. What interest rate will I use?
4. For monetary interest, this is the rule:
a. Base: Principal Amount
b. Start: Upon perfection of the contract
c. Interest Rate:
i. First, the Stipulated Interest Rate (SIR)
ii. In the absence of SIR, NO monetary interest.
d. Formula:
i. Principal x SIR x no. of years from perfection to FJ
5. For compensatory interest, this is the rule:
a. Base: Principal amount
b. Start: Judicial or Extra-judicial Demand, whichever comes first
c. Interest Rate:
i. First, the Stipulated Penalty Interest Rate (SPIR)
ii. In the absence of SPIR, the SIR is used
iii. In the absence of SPIR and SIR, the Legal Interest (LI) is used.
d. NOTE:
i. There are instances when demand is not anymore necessary to put the
debtor in delay. In such cases, the compensatory interest will run from the
maturity date of the loan.
ii. Therefore, it is safer to say that the compensatory interest will start to run
from the time the debtor is in DEFAULT or DELAY.
e. Formula:
i. Principal x interest rate (SPIR, SIR, or LI) x no. of years from DELAY to FJ.
6. For interest on interest, this is the rule:
a. Base: ACCRUED MONETARY INTEREST FROM PERFECTION UP TO JUDICIAL
DEMAND
i. NOTE: Monetary interest only! Do not add the compensatory interest!
ii. NOTE: If there is no monetary interest, there is also no interest on interest!
b. Start: Judicial Demand
c. Interest Rate:

1 Base means the amount that you will multiply with the interest rate to get the interest amount.
 KokzNotes

i. Stipulated Interest-on-Interest Rate (Though this is rarely used, it wont hurt

to remember this. Maam may be so bad. Huhuhu)
ii. If no Stipulated I-on-I interest, use the LI.
d. Formula:
i. Accrued Monetary Interest as of Judicial Demand x interest rate (I-on-I rate
or LI) x no. of years from judicial demand to FJ.
7. After computing all the necessary interests, you can now compute for the amount payable
using the following formula:
a. Total Amount at Final Judgment = (Principal + Monetary Interest + Compensatory
Interest + Interest on Interest)
b. Amount Payable = Total Amount at Final Judgment + (Total Amount at Final
Judgment x Legal Interest x no. of years from FJ to Full Payment)
8. EXTRA NOTES:
a. Always remember July 1, 2013. During the exam, you may forget your birthday, just
not this date.

Sample Problem:

1. Hezro borrowed from Abbey P20 million with 10% interest per annum on January 1, 2010
payable after one year. Demand was waived. Hezro defaulted in his obligation. Abbey sent a
demand letter on January 1, 2012 but was ignored by Hezro. On January 1, 2013, Abbey
filed a complaint for collection of money with the trial court. The case was decided with
finality on July 1, 2015 ordering Hezro to pay the amount of loan together with interests. No
appeal was made. Hezro tendered payment on January 1, 2017. How much must Hezro pay
on the date of payment?