Short answer. The ordering itself is lawful. Article 1253 provides that where the debt produces interest, payment of the principal is not deemed made until the interests have been covered. What is worth checking is whether the interest was validly imposed at all, and at what rate it has been running.
What the law says
If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.
Civil Code, Article 1253 — Interest Applied Before Principal. Read the full provision →
Why interest is taken first
Article 1253 of the Civil Code states the rule in one line: If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. So a monthly remittance is absorbed by whatever interest has accrued, and only what is left over touches the balance. On a loan where the monthly charge is close to what you can afford to pay, the principal will barely move, and that is arithmetic rather than misconduct. The lender is not required to apply your money in the order that suits you, and you cannot insist on a principal-first allocation.
First ask whether interest is owed at all
The article only operates where the debt genuinely produces interest, and that is where many complaints actually lie. Article 1956 provides that no interest shall be due unless it has been expressly stipulated in writing. A verbal understanding that the lender would charge a monthly rate does not satisfy it, and neither does a rate that appears for the first time on a statement of account. Read the loan document itself, not the ledger the lender prepared. If the writing fixes no interest, the payments you have been making should have been reducing the principal all along.
Then look at how the rate is being applied
Where interest is validly stipulated, the next question is what is being charged on top of it and on what base. Statements often bundle several items together — the stipulated interest, a separate penalty or default charge, and collection fees — and a borrower reading a single running total cannot tell which is which. Ask for a written breakdown of the account showing each payment received, its date, and how it was split between interest, penalties and principal. Article 1229 is also worth remembering, since it lets a court equitably reduce a penalty that is iniquitous or unconscionable.
What to do with the next payment
Keep paying, but pay on the record. Article 1252 lets a debtor with several debts of the same kind declare at the time of payment which one it is applied to, and the same article treats a receipt you accept without complaint as fixing the application made in it. So read each receipt when it is issued, and object in writing if it credits something you dispute. If you want the balance to move, any amount you can add above the accruing interest is what does it, and you should ask for that excess to be acknowledged as principal in writing.
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.
- Nunelon R. Marquez vs. Elisan Credit Corporation, G.R. No. 194642, April 6, 2015 — read the decision on LawPhil →
- Spouses Salvador Abella and Alma Abella vs. Spouses Romeo Abella and Annie Abella, G.R. No. 195166, July 8, 2015 — read the decision on LawPhil →
- Rosemarie Q. Rey vs. Cesar Anson, G.R. No. 211206, November 7, 2018 — read the decision on LawPhil →
- Spouses Juan Chuy Tan and Mary Tan vs. China Banking Corporation, G.R. No. 200299, August 17, 2016 — read the decision on LawPhil →
Related provisions
- Civil Code, Article 1253 — Interest Applied Before Principal
- Civil Code, Article 1252 — Application of Payments
- Civil Code, Article 1254 — Application by Operation of Law
- Civil Code, Article 1956 — Interest Must Be Stipulated in Writing
- Civil Code, Article 1229 — Equitable Reduction of the Penalty