Dear PAO,

I loaned my neighbor P200,000, payable within six months. We also verbally agreed that there would be an interest of 1 percent per month. After six months, I demanded payment of both the principal loan and the interest that we agreed upon. However, she refused to pay the interest, saying she would only pay the principal amount. Can I still demand the payment of interest even if our agreement was only verbal?

Vic

Dear Vic,

According to Article 1956 of the New Civil Code, interest on a loan can only be demanded if it has been expressly stipulated in writing. To quote the exact provision of the law:

“ARTICLE 1956. No interest shall be due unless it has been expressly stipulated in writing.”

This provision requires two conditions before a monetary interest can be imposed: (1) there must be an express stipulation for the payment of interest; and (2) this agreement to pay interest must be reduced in writing.

As explained by the Supreme Court in Siga-an v. Villanueva, GR 172227, Jan. 20, 2009, through Associate Justice Minita Chico-Nazario:

“Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.”

For better understanding, we should understand the concept of a simple loan or mutuum. Article 1953 of the New Civil Code defines a simple loan as a contract where a person receives a loan of money and acquires ownership thereof, and is bound to pay to the creditor an equal amount thereof. There are two kinds of simple loan, namely, gratuitous and onerous. In gratuitous simple loan, the debtor only needs to return the principal amount of money as there was no interest imposed. An onerous simple loan, on the other hand, involves an obligation to pay interest.

In your case, your contract with your neighbor is a contract of loan. However, you cannot demand the payment of the interest rate of 1 percent per month because, based on the facts you stated, the said agreement was only verbally agreed upon. To recap, the requirement of the law is that the stipulation of interest must be in writing. Therefore, the absence of a written agreement regarding monetary interest bars you from collecting monetary interest from your neighbor.

We hope that we were able to answer your queries. This advice is 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.

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]