Interest on Loans Should Be in Writing: Relevant Legal Stipulations in the Philippines

In the Philippines, loans are governed by the Civil Code, and when it comes to interest, the law is particularly clear: interest on a loan must be stipulated in writing. This principle is crucial to understanding your obligations and rights when borrowing or lending money. If you're wondering whether you need to pay interest on a loan when it wasn't put in writing, the answer is rooted in these legal provisions.

Legal Stipulations: Civil Code of the Philippines

The Civil Code of the Philippines, specifically Articles 1956 and 1961, governs loans and interests. These articles are clear on the conditions under which interest can be charged on a loan.

- Article 1956: "No interest shall be due unless it has been expressly stipulated in writing."

  This means that if the interest rate on a loan was not agreed upon in writing, the borrower cannot be compelled to pay any interest. Even if both parties verbally agreed to an interest rate, without a written contract, the law will not enforce the interest. Only the principal amount of the loan must be repaid.

- Article 1961: This article emphasizes that loans are essentially gratuitous (free of interest) unless the contrary is clearly stated and agreed upon in writing.

- Article 1959: This also applies when pre-existing loans are modified. If a loan initially didn't include interest but is later renegotiated to add interest, the modification must also be in writing to be enforceable.

These laws protect borrowers from excessive and unfair interest rates, ensuring that interest is only charged when it is properly documented.

Do You Have to Pay Interest if the Loan Was Not in Writing?

If no written agreement specifies the interest rate, you are not legally obligated to pay interest on that loan. The lender can only recover the principal amount that was borrowed. This legal protection exists to prevent abuses where verbal agreements about high-interest rates might lead to unjust obligations for the borrower.

However, it's important to note a few caveats:

- Mutual Trust and Negotiation: In informal lending scenarios where trust exists between the lender and borrower, verbal agreements may be common, but these are not legally binding in terms of interest. While the lender might expect some form of goodwill interest, it is up to the borrower whether or not to pay it.

- Customary Business Practices: In some businesses, informal interest agreements might occur. Even so, to ensure enforceability, business lenders still draft formal contracts that specify the interest rate to avoid any ambiguity.

Practical Implications: Always Have a Written Contract

The legal principle that interest must be in writing not only safeguards the borrower from potential exploitation but also ensures transparency between the two parties involved in the transaction. Both borrowers and lenders should adhere to the following:

1. Create a Loan Agreement: Whether you're borrowing from a bank, a family member, or a friend, having a written loan agreement ensures clarity. The agreement should outline the amount borrowed, the interest rate, the payment schedule, and any other relevant terms.

2. Document Any Amendments: If any changes are made to the loan terms, especially regarding interest, the amendment should also be documented in writing. This protects both parties and ensures the terms remain enforceable by law.

3. Consult a Lawyer: If you're lending or borrowing large sums of money, consulting a lawyer to draft or review the loan contract is a wise step. Legal professionals can ensure that all necessary stipulations, including interest, are clearly stated to avoid disputes.

Conclusion

In the Philippines, interest on loans must be stipulated in writing to be legally binding. If the interest rate was not written down, the borrower is not obligated to pay any interest. This stipulation in the Civil Code protects individuals from unfair lending practices and ensures that all parties are clear about their obligations. Whether you are a borrower or lender, always make sure your loan agreements are well-documented to avoid legal complications down the road.

PHL mortgage rates seen steady until mid-2025

Mortgage rates in the Philippine residential sector are expected to remain unchanged until mid-2025 despite the recent rate cut, according to Colliers Philippines.

“We’ll probably see the full effect by mid-2025, and hopefully that results in lower mortgage rates because the average mortgage rate right now is only about 8.3%,” Joey Roi Bondoc, director for research at Colliers Philippines, told reporters a day before the policy meeting of the Bangko Sentral ng Pilipinas (BSP) on Oct. 16.

“That’s still pretty high, and that has been resulting in lower take-up of residential units, especially in Metro Manila,” he added.

The Monetary Board on Oct. 16 cut benchmark interest rates by 25 basis points (bps), as expected, since price pressures remain manageable. This brought its policy rate to 6%.

BSP Governor Eli M. Remolona, Jr. said another 25-bp cut to benchmark rates could be made at the December 19 meeting.

Lower mortgage rates will stimulate the market, increasing the demand for residential units, Mr. Bondoc noted.

He added that the mid-income segment is mostly affected by higher mortgage rates.

“If you look at pre-pandemic, at the time, we were looking at the take-up in the preselling condominium sector of 55,000-58,000 units. Now we’re good at what? 15,000, 20,000 units in a single year,” he said.

Mr. Bondoc said that Philippine offshore gaming operators (POGOs) were once a crucial factor in the demand for condominiums in Metro Manila.

“Because if you’re an OFW (overseas Filipino worker), the most attractive price point is the P2.5 (million) to P7 (million). So that’s affordable to lower mid-income. Given that mortgage rates are still elevated, some OFWs are still not keen on acquiring residential units,” he said.

Due to the elevated mortgage rates, OFWs are wary in terms of buying residential units despite increasing remittances, Mr. Bondoc added.

Meanwhile, economist Bernardo M. Villegas said the Philippines continues to be one of the fastest-growing economies in the Association of Southeast Asian Nations region despite global uncertainties.

“With a projected growth rate of over 6% in the coming years, we are poised to lead in economic resilience and transformation,” he said during a forum.

Mr. Villegas noted that the current administration’s efforts have established a “solid foundation” for inclusive growth, with advancements in infrastructure, investments, and the digital economy set to propel our progress further.

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Source: Business World

Who can seek assistance of PAO?

In the Philippines, the Public Attorney's Office (PAO) provides free legal assistance to individuals who meet specific criteria. PAO services are generally available to indigent persons, or those who cannot afford to hire private lawyers. Here are the key groups who can seek assistance from PAO, along with the requirements:

 Who Can Seek PAO Assistance?

1. Indigent Individuals:

   - Persons whose net income does not exceed the following ceilings based on the 2021 PAO Revised Operations Manual:

     - Metro Manila: ₱24,000/month

     - Other Cities: ₱22,000/month

     - Other Municipalities: ₱20,000/month

   - The income ceilings may be adjusted periodically, so checking with PAO is advised.

2. Overseas Filipino Workers (OFWs):

   - PAO can assist OFWs in specific cases, such as those involving labor disputes or repatriation.

3. Abused Women and Children:

   - Under Republic Act No. 9262 (Anti-Violence Against Women and their Children Act), PAO provides legal assistance to victims of abuse, regardless of financial capacity.

4. Senior Citizens:

   - Senior citizens may avail of PAO services, especially in cases related to abuse or disputes over benefits, subject to certain requirements.

5. Persons with Disabilities (PWDs):

   - PAO provides legal services to PWDs, particularly in cases involving their rights and welfare.

6. Victims of Human Rights Violations:

   - Individuals who have been victims of government abuses or other forms of human rights violations may seek assistance from PAO, regardless of financial status.

 Requirements for Seeking PAO Assistance

1. Proof of Indigency:

   - To qualify for free legal assistance, an applicant must present a Certificate of Indigency from the barangay or Income Tax Return (ITR), if applicable, to demonstrate that they meet the income threshold.

2. Valid Identification:

   - Applicants are usually required to present a valid government-issued ID (e.g., voter’s ID, SSS, PhilHealth).

3. Documents Related to the Case:

   - For specific legal issues, applicants may need to present supporting documents like complaints, summons, or legal notices.

4. Special Cases (e.g., Senior Citizens, Victims of Abuse):

   - Individuals who do not meet the income requirements but fall under specific categories like victims of abuse or human rights violations may also avail of PAO’s services, subject to certain proof of their situation (e.g., police reports for abuse victims).

PAO lawyers may also provide assistance in cases of criminal defense, civil cases, labor disputes, administrative cases, and other matters involving public interest. However, PAO does not represent clients in cases where there is a conflict of interest with the government.

Source: Ziggurat Real estate