If the item I pledged earns income, dividends, or interest, does that money go toward paying down my loan?

The creditor must account for what the pledge earns

When you pledge something — shares, an interest-bearing note, income-producing property — the creditor holds it as security, but he does not get to pocket what it earns while it is in his hands. Article 2102 requires him to compensate what he receives with those which are owing him. In plain terms, he offsets the income against the interest you owe: the earnings first wipe out or reduce your interest obligation. He cannot keep the dividends as a bonus on top of the loan. This protects the pledgor, because the whole point of a pledge is to secure the debt, not to hand the creditor an extra stream of profit at the debtor's expense while he waits to be paid.

Excess goes to the principal

The article then addresses what happens when the earnings outrun the interest, or when no interest is owing at all. In either case the creditor shall apply it to the principal — that is, to the amount of the loan itself. So the income does not stop working for you once the interest is covered; the surplus keeps chipping away at the debt. If you owe no interest, the entire income goes straight to the principal. The effect is that a productive pledge can steadily shrink your loan over time. The creditor is not entitled to hold onto that surplus; the law directs it toward reducing what you actually owe.

Earnings of the right pledged, and offspring of animals

Article 2102 adds two refinements. First, unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged — so if you pledge a right that itself throws off interest or earnings, those are caught by the pledge too. Second, for a pledge of animals, their offspring shall pertain to the pledgor or owner, meaning the young belong to you, the owner — but they are still subject to the pledge unless you agreed otherwise. In both situations the default rule can be changed by agreement, so the terms you signed matter as much as the article itself.

What this does not change

This article governs how the fruits of a pledge are applied; it does not release you from the balance that remains after they are credited, nor does it let the creditor sell or keep the pledged thing outside the rules that govern foreclosure of a pledge. Because much of Article 2102 operates "unless there is a stipulation to the contrary," the contract you signed can shift these defaults, and a poorly worded clause may cost you the benefit the law would otherwise give. If a creditor is holding income-producing property of yours and not crediting the earnings, or you are unsure how your agreement alters these rules, it is worth having the documents reviewed by counsel.

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.

• Lim Tay vs. Court of Appeals, et al, G.R. No. 126891, August 5, 1998 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 2102 — Fruits of the Thing Pledged