Short answer. Not automatically. Interest that is due and unpaid does not earn interest on its own, but the parties can agree by stipulation to capitalize the unpaid interest, adding it to the principal, and once added that new principal does earn further interest.
What the law says
interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.
Civil Code, Article 1959 — Interest on Interest (Compounding). Read the full provision →
The default rule blocks interest on interest
The starting position in this article is protective of the borrower: interest due and unpaid shall not earn interest. If your loan contract does not say anything about compounding, unpaid interest just sits there as unpaid interest — it does not silently start accumulating its own additional interest on top of what you already owe. A lender cannot simply assume compounding is allowed; the law's default runs the other way.
A stipulation can change that, but it has to be agreed to
The article then carves out an exception that depends entirely on agreement: "the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest." Capitalizing interest means folding the unpaid interest into the loan's principal amount. Once that happens, the enlarged principal — original amount plus the capitalized interest — is what future interest gets calculated on. This only happens if the parties actually stipulated it; it is not something a lender can impose after the fact.
Check what your contract actually says about capitalization
Because this turns entirely on stipulation, the practical question is whether your loan agreement contains a capitalization clause, and if so, what it says about when and how unpaid interest gets added to principal. A loan document that is silent on this point falls back to the default rule against interest on interest. One that includes a capitalization clause needs to be read carefully, since the exact wording determines how and when the compounding kicks in.
This rule is not the whole picture
The article opens with the phrase "without prejudice to the provisions of article 2212," signaling that this is not a stand-alone, self-contained rule — it operates alongside another Civil Code provision on interest. If your situation involves interest that has already become the subject of a legal claim, that separate provision may also be relevant, and it is worth having your specific facts reviewed rather than relying on Article 1959 in isolation.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Lara's Gifts & Decors, Inc. vs. Midtown Industrial Sales, Inc, G.R. No. 225433, September 20, 2022 — read the decision on LawPhil →
- Antonio Tan vs. Court of Appeals, et al, G.R. No. 116285, October 19, 2001 — read the decision on LawPhil →
- Metro Alliance Holdings and Equities Corporation, Polymax Worldwide Limited and Wellex Industries, Inc., G.R. No. 240495 / G.R. No. 240513, September 15, 2021 — read the decision on LawPhil →
- Erma Industries, Inc. vs. Security Bank Corporation and Sergio Ortiz-Luis, Jr. Oca No. IPI 15-4429-P December 6, 2017 Isagani R. Rubio vs. Igmedio J. Basada, Court Legal Researcher Ii, Branch 117, Regional Trial Court , Pasay City, G.R. No. 191274, December 6, 2017 — read the decision on LawPhil →