Kinds of Loans

Mutuum | Kinds of Loans | Loans | CREDIT TRANSACTIONS

CIVIL LAW: CREDIT TRANSACTIONS – MUTUUM

Definition and Nature

Mutuum is a contract of loan whereby one of the parties, referred to as the lender or creditor, delivers to another, referred to as the borrower or debtor, consumable goods or money, with the condition that the borrower shall repay the lender an equivalent amount of the same kind and quality. It is governed by the Civil Code of the Philippines, particularly under Title XI, Chapter 1.

  • Essential Characteristics:
    1. Real Contract – Mutuum is perfected by the delivery of the object (consumable goods or money). Mere agreement without delivery does not create a binding obligation.
    2. Unilateral Contract – Once perfected, it creates an obligation only on the part of the borrower to return what was borrowed.
    3. Gratuitous or Onerous – It can be gratuitous (no interest is charged) or onerous (interest is charged).

Distinction from Commodatum

It is essential to distinguish mutuum from commodatum, as they are both types of loans:

  1. Object:

    • Mutuum involves consumable goods (money, rice, oil, etc.) that cannot be used without being consumed.
    • Commodatum involves non-consumable goods (vehicles, books, etc.) where the borrower returns the exact same item.

  2. Ownership:

    • In mutuum, ownership of the goods passes to the borrower upon delivery, giving them the right to dispose of the goods as they see fit.
    • In commodatum, ownership remains with the lender.

  3. Purpose:

    • Mutuum is for consumption.
    • Commodatum is for use and return.

Requisites of Mutuum

  1. Delivery of Consumable Goods or Money:

    • The lender must physically or constructively deliver the object of the loan.
    • Without delivery, the contract is not perfected.

  2. Obligation to Return the Equivalent:

    • The borrower must return the same amount and kind of goods or money loaned, with no requirement to return the specific items delivered.

  3. Agreement on Terms:

    • The parties must agree on the essential terms, particularly whether the loan is gratuitous or bears interest.

Rules on Interest

The imposition of interest on a loan is strictly regulated to prevent usury:

  1. Stipulation Required:

    • Interest is not presumed; it must be expressly stipulated in writing under Article 1956 of the Civil Code.
    • Oral agreements regarding interest are void.

  2. Rate of Interest:

    • The agreed rate must comply with the Usury Law as amended by Bangko Sentral ng Pilipinas (BSP) circulars.
    • In the absence of agreement, no interest may be charged.

  3. Penalties for Excessive Interest:

    • Agreements charging usurious interest rates are void as to the interest, although the principal obligation remains enforceable.

Obligations of the Borrower

  1. Return the Equivalent:

    • The borrower must return the equivalent amount and quality of the consumable goods or money loaned, as agreed.
    • If repayment involves money, the legal tender of the Philippines must be used unless otherwise stipulated.

  2. Payment of Interest (if agreed):

    • If there is a stipulation for interest, it must be paid at the agreed rate.

  3. Timely Compliance:

    • Repayment must be made at the time and place agreed upon. In the absence of an agreement, the rules on obligations and payment under Articles 1244 to 1251 of the Civil Code apply.

Extinguishment of Mutuum

  1. Fulfillment of Obligation:

    • When the borrower returns the equivalent amount and quality of the goods or money.

  2. Novation:

    • When the original contract is replaced by a new contract.

  3. Compensation:

    • When the borrower and lender become each other’s creditors and the debts are set off against one another.

  4. Loss of Object:

    • If the object of the loan is lost before delivery or when the obligation to return becomes impossible, the contract may be extinguished.

  5. Prescription:

    • The right to enforce repayment of a loan may prescribe under the rules of Article 1149 (10 years for written contracts) or Article 1150 (6 years for oral contracts).

Case Law and Applications

  1. Loan vs. Donation:

    • In Lopez vs. Court of Appeals (1995), the Supreme Court emphasized that loans (mutuum) involve the obligation to return the equivalent, while donations lack this obligation.

  2. Interest Without Stipulation:

    • In Sps. Go vs. The Philippine National Bank (2016), it was reiterated that in the absence of a written stipulation, no interest can be demanded from the borrower.

  3. Forbearance and Delay:

    • If a borrower fails to repay on time, the lender may collect legal interest for delay as provided under Bangko Sentral ng Pilipinas Circular No. 799, setting the rate at 6% per annum unless otherwise agreed.

Practical Considerations

  1. Documentation:

    • It is advisable to execute a written agreement for clarity, especially when interest is charged.
    • Proper acknowledgment of receipt by the borrower safeguards the lender's rights.

  2. Legal Recourse:

    • In case of non-repayment, the lender may file a collection suit in court.

  3. Tax Implications:

    • Interest income derived from loans may be subject to income tax under the Tax Code.

This comprehensive understanding of mutuum provides a robust framework for navigating issues in civil credit transactions, ensuring legal compliance and safeguarding the rights of parties involved.

Commodatum | Kinds of Loans | Loans | CREDIT TRANSACTIONS

CIVIL LAW > CREDIT TRANSACTIONS > LOANS > COMMODATUM

Commodatum is a type of gratuitous loan governed by Articles 1933 to 1952 of the Civil Code of the Philippines. It involves the delivery of a non-consumable thing by the owner (the lender or commodant) to another person (the borrower or commodatary) for the latter's use and for free, with the obligation to return the exact same thing after use.

Below is a meticulous discussion of the essential elements, characteristics, types, obligations of the parties, and other critical provisions related to commodatum:

1. ESSENTIAL ELEMENTS

  1. Delivery of the Thing

    • The lender delivers the thing to the borrower.
    • Ownership of the thing remains with the lender.

  2. Non-consumable Thing

    • The thing lent is not intended to be consumed through use. (e.g., tools, vehicles, or books).
    • If consumable goods are lent but intended to be used for exhibition or display, it can still constitute commodatum.

  3. Gratuitousness

    • Commodatum is always without compensation or consideration. If compensation is involved, it becomes another type of contract, such as a lease.

  4. Obligation to Return

    • The exact same thing must be returned, not a similar or equivalent object.

2. CHARACTERISTICS OF COMMODATUM

  1. Real Contract

    • It is perfected upon the delivery of the thing. Mere agreement without delivery does not create the contract.

  2. Unilateral or Bilateral

    • It is primarily unilateral, as only the borrower typically has obligations (to preserve and return the thing).
    • It may become bilateral when the lender assumes specific obligations (e.g., to reimburse necessary expenses).

  3. Nominate Contract

    • It is specifically provided for and regulated under the Civil Code.

  4. Gratuitous

    • The lender receives no compensation for lending the thing.

3. KINDS OF COMMODATUM

  1. Ordinary Commodatum

    • The thing is lent for the borrower's use for a specified time or purpose.

  2. Precarium (Precarious Commodatum)

    • The lender may demand the return of the thing at will.
    • It arises when:
      • The borrower is allowed to use the thing by mere tolerance of the lender, or
      • No specific period or purpose is stated in the contract.

4. OBLIGATIONS OF THE PARTIES

A. Obligations of the Commodatary (Borrower):

  1. To Preserve the Thing

    • The borrower must exercise extraordinary diligence in the use and preservation of the thing (Art. 1941).

  2. To Use the Thing According to its Purpose

    • The thing must be used only for the purpose stipulated or customary for its nature (Art. 1942).
    • Misuse or use beyond the agreed purpose may lead to liability or termination of the contract.

  3. To Return the Thing

    • The exact same thing must be returned upon the expiration of the period or accomplishment of the purpose (Art. 1946).

  4. Liability for Loss or Damage

    • The borrower is generally liable for the loss or deterioration of the thing if:
      • The loss is due to the borrower’s fault or negligence.
      • The borrower delays returning the thing.
      • The thing is used for purposes other than agreed or customary.
      • The borrower lends the thing to a third person without the lender’s consent (Art. 1942 and Art. 1949).

  5. Reimbursement of Necessary Expenses

    • The borrower must reimburse the lender for extraordinary expenses incurred for the preservation of the thing (Art. 1949).

B. Obligations of the Commodant (Lender):

  1. To Allow Use of the Thing

    • The lender must allow the borrower to use the thing for the agreed purpose or period.

  2. To Reimburse Extraordinary Expenses

    • The lender is obligated to reimburse extraordinary expenses necessary for the preservation of the thing if incurred by the borrower (Art. 1949).

  3. Liability for Defects

    • The lender is liable for damages arising from hidden defects in the thing which the lender knew or should have known but failed to disclose (Art. 1951).

5. RIGHTS OF THE PARTIES

A. Rights of the Commodant (Lender):

  1. To Demand Return

    • The lender may demand the return of the thing upon:
      • The expiration of the period.
      • Accomplishment of the purpose.
      • Breach by the borrower.

  2. To Recover Damages

    • The lender may recover damages for any unauthorized use or deterioration due to the borrower’s fault.

  3. To Demand Immediate Return (Precarium)

    • In precarious commodatum, the lender may demand the return of the thing at will.

B. Rights of the Commodatary (Borrower):

  1. Right to Use

    • The borrower has the right to use the thing in accordance with the terms of the contract.

  2. Right to Reimbursement

    • The borrower may demand reimbursement for extraordinary expenses incurred to preserve the thing.

6. SPECIAL RULES

  1. Loss of the Thing

    • The borrower is not liable for loss if:
      • The thing perishes due to fortuitous events, unless:
        • The borrower is in default.
        • The thing was used for unauthorized purposes.
        • The thing was lent to a third party without the lender’s consent.

  2. Subleasing or Lending

    • The borrower cannot lend or sublease the thing to a third person without the lender’s consent. Violation makes the borrower liable for loss or deterioration (Art. 1942).

  3. Termination of Commodatum

    • The contract terminates upon:
      • Expiration of the period.
      • Accomplishment of the purpose.
      • Demand for return in precarious commodatum.

7. DIFFERENCES FROM MUTUUM (SIMPLE LOAN)

Aspect Commodatum Mutuum
Object Non-consumable things Consumable things (e.g., money, grains)
Ownership Ownership remains with the lender Ownership is transferred to the borrower
Return Exact thing must be returned Equivalent value must be returned
Compensation Always gratuitous May be gratuitous or onerous (with interest)

By understanding these principles, you can properly evaluate and apply the rules on commodatum under Philippine law.

Kinds of Loans | Loans | CREDIT TRANSACTIONS

CIVIL LAW: CREDIT TRANSACTIONS > LOANS > KINDS OF LOANS

Under Philippine law, particularly under the Civil Code of the Philippines, a loan is a contract where one party (the lender) delivers to another (the borrower) either a sum of money or other consumable thing with the agreement that the borrower will return an equivalent amount or kind (Article 1933). Loans are broadly categorized into commodatum and mutuum, which are further differentiated based on their subject matter, nature, and purpose.

I. COMMODATUM

Commodatum is a gratuitous contract wherein the lender delivers a non-consumable thing to the borrower (called the bailee) for the borrower’s temporary use, and the borrower is obliged to return the same thing after use.

A. Characteristics of Commodatum:

  1. Gratuitous:
    • Commodatum is essentially without compensation. If the contract involves compensation, it is not a commodatum but another contract (e.g., lease).
  2. Non-consumable Things:
    • The subject matter of commodatum is a non-consumable thing, which means it cannot be used up or consumed through its normal use (e.g., tools, furniture, vehicles).
  3. Transfer of Use:
    • Only the use of the object is transferred, not its ownership.
  4. Return of the Same Thing:
    • The exact same object loaned must be returned to the lender after the agreed period or purpose.

B. Types of Commodatum:

  1. Ordinary Commodatum:
    • The thing is loaned for the borrower’s general use and is returned after the expiration of the term or upon demand.
  2. Precarium:
    • The lender may demand the return of the thing at will. This applies when no specific term or purpose is agreed upon, or when the purpose has been fulfilled.

C. Obligations of the Bailee (Borrower):

  1. Use the thing only for the purpose stipulated and with due diligence (Articles 1939–1940).
  2. Return the thing upon the expiration of the term or fulfillment of the purpose (Article 1941).
  3. Be liable for loss or deterioration caused by negligence or unauthorized use (Articles 1942–1943).

D. Obligations of the Bailor (Lender):

  1. Allow the borrower to use the thing for the agreed purpose or term.
  2. Reimburse the borrower for necessary expenses incurred for the preservation of the thing (Article 1948).

II. MUTUUM

Mutuum is a contract of simple loan where the lender delivers to the borrower money or other consumable things, and the borrower is obligated to return an equivalent amount of the same kind and quality.

A. Characteristics of Mutuum:

  1. Real Contract:
    • Mutuum is perfected upon the delivery of the thing loaned.
  2. Consumable Things:
    • The subject matter is typically consumable things such as money, grain, oil, or other items that are exhausted upon use.
  3. Ownership Transfers:
    • Ownership of the consumable thing passes to the borrower, who may use it as they see fit.
  4. Obligation to Return:
    • The borrower must return the equivalent of the thing loaned, not the exact same thing.

B. Kinds of Mutuum:

  1. Ordinary Mutuum:
    • The borrower is obligated to return the equivalent of the thing loaned at the agreed time or upon demand.
  2. Mutuum with Interest:
    • The borrower pays interest in addition to returning the principal amount. Interest must be expressly stipulated in writing (Article 1956); otherwise, the loan is presumed interest-free.

C. Interest Rules (Mutuum with Interest):

  1. Conventional Interest:
    • Must be agreed upon in writing; otherwise, the loan bears no interest (Article 1956).
  2. Usury:
    • Although the Usury Law has been rendered ineffective by Central Bank Circular No. 905 (1982), the court retains discretion to reduce iniquitous or unconscionable interest rates (Article 1229).
  3. Legal Interest:
    • In the absence of an agreement, interest may only be charged as legal interest under applicable laws (e.g., 6% per annum under Bangko Sentral ng Pilipinas guidelines for monetary obligations).

III. DISTINCTIONS BETWEEN COMMODATUM AND MUTUUM

Aspect Commodatum Mutuum
Subject Matter Non-consumable things Consumable things
Nature Gratuitous May be gratuitous or onerous (with interest)
Ownership Transfer Ownership remains with lender Ownership is transferred to borrower
Obligation to Return Exact same thing must be returned Equivalent of the thing must be returned
Perfection By mere consent Upon delivery of the thing loaned

IV. SPECIAL RULES ON LOANS

  1. Requisites of Loans:

    • Consent of the parties.
    • Delivery of the thing loaned (real contract for mutuum; commodatum perfected by consent).
    • Borrower’s obligation to return the same (commodatum) or equivalent (mutuum).

  2. Liability for Loss or Damage:

    • In commodatum, the borrower is liable for loss even due to fortuitous events if:
      • The borrower delayed in returning the thing.
      • The borrower used the thing for unauthorized purposes.
      • The thing loaned was delivered with undertaking of safekeeping (Article 1942).
    • In mutuum, the borrower is not liable for loss of the thing loaned due to fortuitous events, as ownership has already passed.

  3. Nullity of Loan Agreements:

    • Loans with an unconscionable or illegal interest rate may be declared null and void as to the interest component, while the principal remains demandable.

  4. Stipulations in Writing:

    • To charge interest, the agreement must be written, otherwise the court presumes a zero-interest loan (Article 1956).

This summary provides a meticulous breakdown of the kinds of loans under Philippine Civil Law, focusing on the rules governing commodatum and mutuum, their distinctions, and specific obligations.

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