Dear PAO,

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?
Ken

FROM MANILA TIMES – Nov 4, 2013

Dear Ken,
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.

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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.