The terms borrowing and lending are often used interchangeably, but they are two quite different things. Did your neighbour lend you a lawnmower? Then it’s a loan. But if he lent you a plate of eggs, it would be a loan. We’ll look at exactly how the two institutes differ and when you might encounter them in this article.
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In the case of a loan agreement, this is a free temporary loan of a non-usable item. Unusable in this context means a thing that cannot be used, only enjoyed. In this case, the borrower does not become the owner of the item, but has only borrowed it. This could be, for example, real estate or a machine. It is also important that the lender cannot ask for payment for the borrowing, whether in the form of money or perhaps some kind of consideration.
The loan agreement may specify the period of validity of the loan. This may be a specific date or an event that is to occur in the future. An example might be if your car breaks down and you get a replacement from the garage. The loan agreement then lasts until your car is back in service.
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However, the loan agreement does not need to include a duration date at all, but in this case the purpose of the loan must be included in the agreement. Once this purpose is fulfilled, the loan ends and the borrowed item should be returned as soon as possible. In this case, for example, the borrowing of a mixer from a neighbour for the purpose of building a wall. Once the wall is completed, the borrowing should end and the mixer should be returned.
There are certain obligations on the part of both the borrower and the lender:
The lender must deliver the item to the borrower in a condition that allows its proper use. In the event that the item has a defect of which the borrower had no prior knowledge, the lender must compensate for the damage caused. In addition, the lender must also inform the borrower how to handle and use the borrowed item.
The borrower must use the borrowed item in the manner specified in the contract. However, if the manner of use is not specified, the borrower must use the item in a reasonable manner so as to avoid unnecessary wear and tear or damage. In addition, the borrower is obliged to bear the costs of using the borrowed item (e.g. petrol for the operation of the car). The only exception is for extraordinary costs (e.g. the cost of repairing a fault in the car). Last but not least, the lender must not transfer the item to a third party for use without the lender’s consent.
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A loan agreement, unlike a borrowing agreement, relates to a usable item. A loan agreement therefore consists in the lending of a usable thing with the proviso that the same thing, but of the same kind, is not returned on termination. Therefore, because of the nature of the thing lent, the borrower becomes the owner of that thing. In this sense, a usable item is an item which can be used and thus consumed. It is therefore, for example, money, building materials or foodstuffs. Consequently, the same thing cannot be returned because the money is spent, the building materials are used to build a house and the food is eaten. Therefore, another thing of the same kind is returned.
It is also important to note that the loan may or may not be chargeable. If it is chargeable, the money lent is returned with interest or, in the case of material things, the thing is returned in a larger quantity or of a higher quality corresponding to the interest.
The duration of the loan may be specified in the contract, but it is not necessary. If the duration is not fixed, the contract is terminated with the termination of the contract. The notice period is set at 6 weeks. However, it is possible to set the notice period in the contract according to the needs of both parties.
In practice, the biggest problems tend to arise with loans between friends or family. As long as it is repaid, everything works without any problems. But once there is a delay or a dispute over terms, it becomes crucial what was actually agreed and how this can be proven. This is when it makes sense to have a loan agreement drafted or reviewed by an attorney. We can help you set up the maturity, interest, acknowledgement of delivery and default resolution so that the agreement protects both parties and stands up to enforcement.
Are you lending money to anyone? Draw up a contract to that effect. We will advise you on what such a contract should definitely contain so that you don’t lose your money.
Mr Novák lent his friend CZK 180,000 to complete the reconstruction of his flat. They agreed informally, he sent the money by wire transfer and expected that the amount would be returned within half a year. However, when the acquaintance stopped communicating, it turned out that the repayment period, the agreed interest rate and whether it was actually a loan or another form of financial assistance were not clearly recorded between them.
We first reviewed the wire transfers, follow-up messages and other communications to properly evaluate what could be proven in the case. We then drafted a pre-suit notice and designed a procedural process to make the claim as strong as possible. In many similar cases, it is the quality of the documentary preparation that determines whether the amount owed can be recovered quickly or whether the litigation is unnecessarily prolonged due to an unclear agreement.
As we have already mentioned, borrowing refers to non-useable items. You may therefore encounter it in situations where you borrow some tools or property. Often the loan will involve cars or land.
You may come across a car loan agreement, for example, in the case of a replacement vehicle. This may be provided by a garage while your car is being repaired or by your insurance company in the event of a car accident. You may then want to draw up a loan agreement yourself, for example if you want to lend your van to a friend for a move. You may think that a contract is not needed for something like this, but it is always better to protect yourself unnecessarily than to regret it later.
A car hire agreement should contain some basic information:
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You may encounter a land lease agreement mainly in the case of public land or land owned by municipalities. Usually, these lands are borrowed for use by various associations or even private individuals for the purpose of improving the land or beneficial use of unused land.
Even a land loan agreement should contain some basic information:
Read more about land leases and other less common property contracts in our next article.
Borrowing and lending sound similar, but legally they are different institutions with different consequences. In a loan, you give another person an unusable item for temporary use free of charge and expect the return of the same item. With a loan, on the other hand, you are transferring a usable thing, typically money, and the same kind of thing is returned. It is this distinction that is important in determining the rights and obligations of the parties, liability for damages, setting the repayment date and the ability to negotiate interest. In everyday life, people often conflate these concepts, but in a dispute, the details are then decisive. The higher the value of the item or amount and the greater the risk of future misunderstanding, the more sense a well-drafted contract makes.
With a loan, you return the same thing, with a loan, the same kind of thing.
Yes. If a fee is agreed for the use, it will usually no longer be a loan.
Yes. Interest and other repayment terms can be negotiated for a cash loan.
Not always, but for higher values or longer durations, a written form is appropriate for evidence.
Then the termination must be dealt with according to the statutory rules or what the parties have demonstrably agreed.
You can, but it’s risky. Without a written agreement, it is harder to prove the condition of the vehicle, the return period and liability for damage.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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