WHAT IS LOAN?

Art. 1933. By the contract of loan, one of the parties delivers to another, either something
not consumable so that the latter may use the same for a certain time and return it, in which the
case the contract is called a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which the case the
contract is simply called a loan or mutuum.

CHARACTERISTICS OF LOAN
1. Real Contract- because the delivery of the thing is necessary for the perfection of the
contract.
2. Unilateral Contract – because once the subject matter has been delivered, it creates
obligations on the part of only one of the parties (borrower).

KINDS OF LOAN
 Commodatum- where the bailor (lender) delivers to the bailee (borrower) a non-
consumable thing so that the latter may use it for certain time and return the identical
thing.
 Mutuum- where the lender delivers to the borrower money or other consumable thing
upon the condition that the latter shall pay the same amount of the same kind and quality.
TWO TYPES OF COMMODATUM
 Ordinary commodatum – bailor cannot just demand the return of the thing at will
because there is a period agreed upon by the parties.
 Precarium – one whereby the bailor may demand the thing loaned at will in the
following cases: a.) If the duration of the contract had not been stipulated; b.) If the use to
which the thing loaned should be devoted had not been stipulated; or c.) If the use of the
thing is merely by tolerance of the owner

Art. 1936 Consumable goods may be the subject of commodatum if the purpose of the contract
is not the consumption of the object, as when it is merely for exhibition
Art. 1937 Movable or immovable property may be the object of commodatum.
Art. 1938 The bailor in commodatum need not be the owner of the thing loaned
Art. 1939 Commodatum is purely personal in character. Consequently
(1) The death of either the bailor or the bailee extinguishes the contract
(2) The bailee can neither lend nor lease the object to the contract to a third person. However,
the member of the bailee’s household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing forbids such use.

Art. 1940 A stipulation that the bailee may make use of the fruits of the thing loaned is valid

OBLIGATIONS OF THE BAILEE (BORROWER)

1. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the
thing loaned. (Article 1941)
2. The bailee is liable for the loss of the thing, even if it should be through a fortuitous
event;
(a) If he devotes the thing to any purpose different from that for which it has been
loaned.;
(b) If he keeps it longer than the period stipulated, or after the accomplishment of the
use for which the comodatum has been constituted;
(c) If the thing loaned has been delivered with appraisal of its value, unless there is
a stipulation exempting the bailee from responsibility in case of a fortuitous event;
(d) If he lends or leases the thing to a third person, who is not a member of his
household.
(e) If, being able to save either the thing borrowed or his own thing, he chose to save
the latter.
3. The bailee does not answer for the deterioration of the thing loaned due only to the use
thereof and without his fault (1943)
4. The bailee cannot retain the thing loaned on the ground that the bailor owes him
something, even though it may be by reason of expenses. However, the bailee has a right
of retention for damages mentioned in article 1951 (Article 1944)
5. When there are two or more bailees to whom a thing is loaned in the same contract, they
are liable solidarity (Article 1945)

OBLIGATIONS OF THE BAILOR (LENDER)

1. The bailor cannot demand the return of the thing loaned till after the expiration of the
period stipulated, or after the accomplishment of the use for which the commodatum has
been constituted. However, if the meantime, he should have urgent need of the thing, he
may demand its return or temporary use. (Article 1946)
2. The bailor may demand the thing at will, and the contractual relation is called a
precarium, in the following cases:
(a) If neither the duration of the contract nor the use to which the thing loaned should
be devoted, has been stipulated
(b) If the use of the thing is merely tolerated by the owner
3. The bailor may demand the immediate return of the thing if the bailee commits any act on
ingratitude specified in Article 765 (Article 1948)
4. The bailor shall refund the extraordinary expenses during the contract for the preservation
of the thing loaned, provided the bailee brings the same to the knowledge of the bailor
begore incurring them; except when they are so urgent that the reply to the notification
cannot be waited without danger.
If the extraordinary expenses arises on the occasion of the actual use of the thing by
the bailee, even though if he acted without fault, they shall be borne equally of both the
bailor and the bailee, unless there is stipulation to the contrary (Article 1949)
5. If for the purpose of making the use of the thing, the bailee incurs expenses other than
those referred in article 1941 and 1949, he is not entitled to reimbursement. (Article
1950)
6. The bailor, who, knowing the flaws of the thing loaned, does not advise the bailee of the
same, shall be liable to the latter for the damages which he may suffer by reason thereof.
(Article 1951)
7. The bailor cannot exempt himself from the payment of expenses or damages by
abandoning the thing to the bailee (Article 1952)
Simple loan or mutuum
 Is a contract whereby one of the parties deliver to another money or other consumable thing
with the understanding that the same amount of the same kind and quality shall be paid.

Art. 1953 A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.

Obligation of borrower is to “pay”

The contract of Mutuum involves the return of the equivalent only and not the identical
thing because the borrower acquires ownership thereof.
The promise of borrower to pay is the consideration for the obligation of the lender to
furnish the loan. A loan is the thus a bilateral contract.
Art. 1954 A contract whereby one persons transfers the ownership of non-fungible things to
another with the obligation on the part of the latter to give things of the same kind and
quantity, and quality shall be considered a barter

Mutuum and commodatum distinguished from barter

By the contract of barter or exchange one of the parties binds himself to give one thing in
consideration of the other’s promise to give another thing.
1. The distinction between mutuum and barter lies in the subject matter. In the former, it is
money or any other fungible things; in the latter, non-fungible things.
2. In commodatum, the bailee is bound to return the identical thing borrowed when the time
has expired, or the purpose has been served. In barter, the equivalent thing is given in
return for what has been received
3. Mutuum may be gratuitous and commodatum is always gratuitous. Bater, on the other
hand, is an onerous contract. It is really mutual sale.

Art. 1955 The obligation of a person who borrows money shall be governed by the
provisions of articles 1249 and 1250 if this code.
If was loaned is a fungible thing other that money, the debtor owes another thing of the same
kind, quantity and quality, even if it should change in value. In case it is impossible to
deliver the same kind, its value at the time of the perfection of the loan shall be paid.

Form of payment
1.LOAN OF MONEY- if the thing loaned is money, payment must be made in the
currency which is legal tender in the Philippines and in case of extraordinary inflation or
deflation, the basis of payment shall be the value of the currency at the time of the
creation of the obligation.
2.LOAN OF FUNGIBLE THING- If what was loaned is a fungible thing other than
money, the borrower is under obligation to pay lender another thing of the same kind, quality
and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of
the perfection of the loan.
Art. 1956 no interest shall be due unless it has been expressly stipulated in writing.
REQUISITES FOR RECOVERY OF MONETARY INTEREST
1. The payment must be expressly stipulated
2. The agreement must be in writing
3. The interest must be lawful

EXCEPTION TO THE RULE

1. INDEMNITY FOR DAMAGES- The debtor in delay is liable to pay legal interest (6%)
as indemnity for damages in case of delay even in the absence of stipulation of the
payment of interest.
2. INTEREST ACCRUING FROM UNPAID INTEREST- Interest due shall earn legal
interest from the time it is judicially demanded all due the obligation might silent upon
this point.
INTEREST PAYABLE IN CASE OF BREACH OF OBLIGATION
1. LOAN FOR FORBEARANCE OF MONEY
2. OTHER THAN LOAN OR FORBEARANCE OF MONEYB
3. JUDGEMENT OF COURT HAS BEEN FINAL AND EXECUTORY

Art.1457 Contracts and stipulation, under any cloak or device whatever, intended to
circumvent the law against usury shall be void. The borrower may recover in accordance
with the law on usury.

INTEREST DEFINED
Interest is the compensation allowed by or fixed by the parties for the loan or forbearance of
money, goods, or credits.

KINDS OF INTEREST

 SIMPLE INTEREST – That which is paid for the principal at a certain rate fixed or
stipulated by the parties.
 COMPOUND INTEREST- That which is imposed upon interest due and unpaid. The
accrued interest is added to the principal sum and the whole is treated as a new principal
upon which the interest for the next period is calculated.
 LEGAL INTEREST- That which the law directs to be charged in the absence of any
agreement as to the rate between the parties. Thus, as provided in section 1, the rate
collected is 6% per annum. The same rate is allowed in judgment when there is no
express contract between the parties in anticipation of the same;
 LAWFUL INTEREST- That which the laws allow or do not prohibit, that is, the rate of
interest is within the maximum prescribed by law
 UNLAWFUL OR USURIOUS INTEREST- That which is paid or stipulated to be paid
beyond the maximum fixed by law.
Art. 1958 In the determination of the interest, if it is payable in kind, its value shall be
appraised at the current price of the products or goods at the time and place of payment.
DETERMINATION OF INTEREST PAYABLE IN KIND
This article has the same purpose: to make usury harder to perpetrate.

Art. 1959 Without prejudice to the provisions of article 2212, 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.

WHEN UNPAID INTEREST EARNS INTEREST

As a general rule, accrued interest shall not earn interest except only in two instances:
1. When judicially demanded as provided for in Article 2212
2. When there is an express stipulation made by the parties, to wit: that the interest due and
unpaid shall be added to the principal obligation and the resulting total amount shall earn
interest. This practice is called compounding interest and it is allowed if there is an
expressly stipulation.
Art. 1960 If the borrower pays interest when there has been no stipulation therefor, the
provisions of this code concerning solutio indebtiti, or natural obligation, shall be applied, as
the case may be.

PAYMENT OF INTEREST WITHOUT STIPULATION

1. Where unstipulated interest is paid by mistake, the debtor may recover as this would be a
case of solutio indebiti or undue payment.
2. Where the unstipulated interest is paid voluntarily because the debtor feels morally
obliged to do so, there can be no recovery as in the case of natural obligation.

Art. 1961 Usurious contracts shall be governed by the usury law and other special laws, so
far as they are not inconsistent with this code

USURIOUS TRANSACTIONS GOVERNED BY SPECIAL LAW

The Usury law and other special laws apply only so far as they are not inconsistent with the
Civil Code. However, according to article 1175, “ usurious transaction shall be governed by
special laws”. Article 1175 and 1961 have given rise to the question: in case of conflict,
which prevail, the usury law or the civil code?