Last week, the Monetary Board—the country’s policy-making body on money, banking and credit—changed the legal rate of interest for loan and credit agreements.
Through Circular No. 799, the board declared that, effective July 1, “the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be 6 percent per annum.”
This means that if the parties fail to state in writing the interest payable on any of the transactions mentioned, or on account of a court judgment involving a related money claim, the imposable interest is 6 percent every year.
The circular amends an issuance of the board in 1974, or 39 years ago, that fixed the legal interest at 12 percent per year.
The rate reduction comes in the wake of the country’s low inflation rate which dipped to a five-year low of 3.2 percent last year. Besides, the capital market is so liquid that banks are awash in money waiting to be borrowed by interested parties.
The rule of the thumb in interest rate setting of this nature is to peg it at a level that reflects the inflation rate and add extra points to enable the moneylenders to earn some profit from the transaction.
A loan is the act of lending money to another person on condition that he will repay it within a specific period of time.
If the parties have agreed on the amount of interest payable on the loan, that agreement is binding on them. In the absence of such agreement, the interest due is 6 percent per year.
The inclusion of “forbearance of money, goods and credits” in the coverage of legal interest has been a bone of contention in transactions where certain conditions, in addition to standard payment clauses, are imposed, as in the case of conditional sale of property and consignment of goods.
This situation is often seized upon as justification by unscrupulous parties to refuse payment of the legal interest if, due to inadvertence or some false sense of trust and confidence, the parties (usually the creditor) failed to clear up this matter in the agreement.
In “Hermojina Estores vs Spouses Arturo and Laura Sapangan, G.R. No. 175139, dated April 18, 2012,” the Supreme Court said forbearance of money, goods or credits refers to “arrangements other than loan agreements where a person acquiesces to the temporary use of his money, goods or credits pending the happening of certain events or fulfillment of certain conditions.”
The instant case involves the conditional sale of a parcel of land where the sellers agreed that, after receipt of certain sums of money from the buyers, they will secure the necessary government permits to enable the buyers to immediately move into the property.
Seven years after receipt of P3.5 million from the buyers, the sellers failed to live up to their commitments. The delay prompted the buyers to demand the return of their money with interest at 12 percent a year compounded annually.
The sellers refused to pay the interest sought. They argued that since the conditional deed of sale provided only for the return of the down payment in case of breach, they cannot be held liable to pay legal interest on it.
The case wended its way through the judicial mill for 12 years, from the regional trial court to the Court of Appeals and finally to the tribunal.
The tribunal ruled that the buyers “were deprived of the use of their money pending the fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money.
“And the compensation for the use of their money absent, any stipulation should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.”
Bottom line, the sellers were ordered to return the P3.5 million, plus 12 percent interest computed from the day the demand for repayment was made in 2000 until fully paid, and attorney’s fees.
Although meant for general commercial application, the implementation of the new legal interest rate will rest primarily with our courts and administrative offices that process and enforce money claims and awards.
The judges who decide on money claims brought before them and the sheriffs who will enforce judicial awards through direct payment or garnishment of bank accounts, should be properly informed of the change in legal interest rate.
Since there has been scant publicity about this change, these officials may still think the 39-year-old 12 percent per-year legal interest is still in effect.
Government offices that handle money claims or impose fines for violation of regulatory rules that impose interest for delayed payments should be similarly put on notice about the reduction of the legal interest rate.
For example, at the National Labor Relations Commission, awards of separation pay or backwages to employees are entitled to legal interest from the time they were due or for every day of delay of payment from the date of the award.
Nasty disagreements in the computation of such awards may arise if the sheriffs who will implement them are not apprised of the interest adjustment.
It should be borne in mind that since the new rate is effective only on July 1, money awards entitled to legal interest that started to run before that date and continue to remain unpaid up to the present will have two interest rates depending on when the interest accrued.
Some people are going to be unhappy about this change of fortune.
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