Photo from Pexels | Mikhail Nilov
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Monetary interest is a compensation fixed by the parties for the use or forbearance of money. On the other hand, compensatory interest may also be imposed by law or by courts as penalty or indemnity for damages. The right to interest applies only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded. (Norsk Hydro, Inc. v. Premiere Development Bank, G.R. No. 226771, September 16, 2020)
What is the difference between monetary and compensatory interest?
The Supreme Court’s ruling in the case of Isla v. Estorga (G.R. No. 233974, July 02, 2018) is instructive on this matter:
There are two (2) types of interest, namely, monetary interest and compensatory interest. Monetary interest is the compensation fixed by the parties for the use or forbearance of money. On the other hand, compensatory interest is that imposed by law or by the courts as penalty or indemnity for damages. Accordingly, the right to recover interest arises only either by virtue of a contract (monetary interest) or as damages for delay or failure to pay the principal loan on which the interest is demanded (compensatory interest).
Anent monetary interest, the parties are free to stipulate their preferred rate. However, courts are allowed to equitably temper interest rates that are found to be excessive, iniquitous, unconscionable, and/or exorbitant, such as stipulated interest rates of three percent (3%) per month or higher. In such instances, it is well to clarify that only the unconscionable interest rate is nullified and deemed not written in the contract; whereas the parties’ agreement on the payment of interest on the principal loan obligation subsists. It is as if the parties failed to specify the interest rate to be imposed on the principal amount, in which case the legal rate of interest prevailing at the time the agreement was entered into is applied by the Court. This is because, according to jurisprudence, the legal rate of interest is the presumptive reasonable compensation for borrowed money.
Related Articles:
- WHAT IS A CONTRACT OF LOAN? – ALBURO LAW
- Frequently Asked Questions on Credit and Collection Laws – ALBURO ALBURO AND ASSOCIATES LAW OFFICES
Click here to subscribe to our newsletter
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.
All rights reserved.