LOAN. — It is the contract by which one party (the lender) delivers to the other (the borrower) a determined quantity of money or other fungible goods, and the other party undertakes to return the same quantity of goods of the same kind and quality (Italian Civil Code, art. 1813).
I. LEGAL PROFILE
Since a loan is a real contract, the delivery of the thing is essential to it, so that, before such delivery, there may be—provided the requisite conditions are met—a promise of a loan, but not a loan properly so called (art. 1822). Since the mere use generally destroys the fungible thing, that use cannot be separated from the thing itself. Therefore, the delivery of the thing necessarily transfers to the borrower not only its use but also its ownership (art. 1814), along with all risk attached to II. However, the lender remains liable for damage caused to the borrower by defects in the thing, if the lender knew of them and did not disclose them (art. 1821). At the appropriate time (arts. 1816–17), the thing lent must be returned. Fungible goods other than money must be returned in quantities, kinds, and qualities equal to those lent; fluctuations in economic value during the duration of the loan are irrelevant. For the repayment of money, it is sufficient that the sum repaid corresponds to the same nominal value as that lent (nominalistic principle), even if the intrinsic value differs for any reason (art. 1277). Only if the loan was made in metallic currency (gold or silver) and repayment in the same kind was expressly agreed, must repayment be made according to the intrinsic value the currency had at the time of the loan (art. 1280).These explicit provisions of Italian law also apply to the fulfillment of natural obligations of conscience, at least in Italy and insofar as justice demands it; equity, depending on circumstances, might require appropriate modifications to the advantage of either the lender or the borrower. Thus, based on the nominalistic principle maintained in Italian law, monetary devaluation (v.) results in harm only to the creditor. Therefore, from a moral standpoint, one must examine in concreto the utility and advantage the loan has brought to the debtor in order to consider possible compensation to the creditor. Often, and this is the ordinary case in the issuance of loans by commercial companies, public entities, etc., the obligation of repayment is secured and incorporated into special credit instruments (e.g., bonds) that have market value and can therefore be the object of transactions, allowing the lender and subsequent holders to realize their market value even before the loan’s maturity.
In addition to the return of the thing, interest must also be paid at a rate of 5%; however, the parties’ agreement may modify the interest rate or abolish it entirely (art. 1815). The loan is extinguished by repayment, which may be made in installments; but failure to pay interest or any installment gives the lender the right to demand early termination of the contract (art. 1820).
II. MORAL PROFILE
1. Granting the loan
By the natural law of fraternal charity, one must grant a loan to one’s neighbor, whether poor or rich, who has need of II. The sum necessary to seize an opportunity for a good business deal does not constitute a true necessity for a loan when the borrower’s general economic conditions are proportionate to the needs of his own life and that of his family. The more serious the neighbor’s need and the fewer the inconveniences it causes us, the greater the obligation to grant the loan. Fr. Vermeersch (Theol. mor., II, Rome 1924, n. 449,5) very aptly suggests discretionary almsgiving instead of a loan when the latter would be of little use to the borrower and very risky for the lender.2. Interest and its measure
Whatever fungible goods are lent, in practice, interest at the legal rate is certainly lawful (Code of Canon Law, can. 1543). But in law, what title justifies the acquisition of ownership through interest? The theological-moral literature on this subject is exceedingly abundant (v. USURY). Today, apart from historical importance, the principles established therein provide a sure criterion for determining the maximum and minimum limits within which the interest rate may lawfully fluctuate. Analyzing the loan in terms of its constitutive elements alone, the right-duty to interest is clearly excluded. For the mere use consumes the fungible thing, and when considered in itself, apart from the thing, it has no economic value; therefore, with the mere return of the thing, the lender receives all that belongs to him by law. Any additional amount is not supported by any title: neither from the lending of the thing, which is fully returned, nor from the lending of its use, which, apart from the thing, has no economic value. The reality of this principle is especially evident in loans made for consumption purposes, the only type generally possible in ancient times. Canon law, even today, accepts and sanctions this principle in the first part of can. 1543; Italian civil law assumes it in the definition it gives of a loan in art. 1813. However, in practice, a loan is not carried out in the abstract configuration of its essential elements alone; concrete circumstances, dependent on the economic position of either the lender or the borrower, intervene and modify the consequences. Indeed, it may happen that, by lending the thing, the lender in some way impairs his economic position (damnum emergens) or forgoes its productive use (lucrum cessans). On the other hand, the borrower’s precarious economic position might make the return of the thing uncertain (risk of the thing) or at least delayed (danger of delay). Now, these four circumstances—damnum emergens, lucrum cessans, risk of the thing, danger of delay—have economic value and thus, if they actually occur, can constitute as many titles to a proportionate compensation in addition to the return of the thing. However, they remain extrinsic titles to the loan, which, as a contract, is essentially gratuitous in itself.Only extrinsic titles to the loan, when they truly occur, can justify the right-duty to interest and determine its just measure. In the light of this most ancient doctrine, the institution of the loan takes its place within the framework of modern social economy.
The guarantees of bills of exchange or credit instruments, which are usually received in granting a loan, nullify the risk of the thing and the danger of delay; therefore, they generally cannot today be invoked as titles to the right to interest. On the other hand, lucrum cessans has become a customary effect of the loan. For in the modern economic system, opportunities to trade in any kind of goods and in money itself are greatly facilitated and multiplied; thus, in the vast majority of cases, loans are made for profit. It is therefore legitimate to presume that every loan entails, to the lender’s disadvantage, a lucrum cessans for which proportionate compensation is due. This justifies the right to interest, now generally connected with the loan contract. The legal rate of 5% is presumed to represent the average profit among many possible ones. However, since circumstances may differ, it is legally permissible and morally licit for the parties to agree on a rate higher than the legal one or even on the total exclusion of interest. Finally, damnum emergens, though rarely occurring, could in particular cases constitute a further title to the right to interest and raise the rate.