Dear PAO,

I obtained multiple loans from a lending institution. The loans have different due dates or maturities. I already started paying my first loan and have been religiously complying with my obligations. Last month, I was lucky that I accumulated extra income from my personal transactions, so I went to the creditor in order to settle my first loan. The lending institution, however, said that my payment will be applied proportionately to my multiple loans, to which I objected because my other loans were not yet due. They refused to fully apply my payment to my first loan. According to them, they have the absolute discretion or right to choose which loans my payment would be applied. Is this correct?

Zaldy

Dear Zaldy,

Payment is one of the modes to extinguish an obligation. This is in accordance with Article 1231 (1) of the New Civil Code of the Philippines. Relative thereto, the debtor who makes a payment may decide which debt should be satisfied, in consonance with Article 1252 of same law which provides that:

“He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.

“If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.”

Glaring from the aforestated provision of law, the payment shall not be applied to debts which are not yet due. Applying payment to a debt which is not yet due or demandable would place the creditor in bad faith. Remember that both the creditor and the debtor must comply with the terms of the contract in good faith. This is exactly provided under Article 1159 of the New Civil Code of the Philippines, which states that: “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.”

In Premier Development Bank v. Spouses Castañeda, GR 185110, Aug. 19, 2024, which was penned by Supreme Court Associate Justice Alfredo Benjamin Caguioa, the principle of “KEEPING IN GOOD FAITH” in the application of payment was illustrated in this wise:

“‘Keeping in good faith’ therefore required PDB to apply the payment of Spouses Castañeda to the Subject Loan to result in its full satisfaction, instead of distributing it to other loans that are not yet due and demandable. ‘Keeping in good faith’ would also be PDB applying the payment of Spouses Castañeda to the Subject Loan to result in its full satisfaction and applying any excess of the payment of their other obligations.

“And the contrary — that is, insisting on applying payment to loans that are not yet due and demandable, while allowing the Subject Loan to remain delinquent and continue to accumulate interest and other charges, even if the payment is sufficient to fully satisfy the latter — is NOT ‘keeping in good faith.'”

Applying the above-quoted decision to your situation, the lending institution’s claim that they have the absolute discretion which loan should be paid first has no legal basis. In fact, it is the debtor who has the right to decide at the time of payment as to which loan should the payment be applied. In your case, your first loan should be satisfied first as it is already due and as you wished. Thus, the lending institution, which refused to apply the payment to your first loan and insisted on applying the same to your other loans, which are not yet due, is acting in bad faith.

We hope that we were able to answer your queries. This advice was based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected].