Nowadays, a loan is a common tool for dealing with unexpected expenses, financing a home, buying a car, or even equipping a studio. Although it may seem simple to borrow money, in practice, choosing the right loan is a matter of careful consideration. What to look out for, how are loans divided and how does annuity repayment work? Let’s go through everything in detail.
From a legal point of view, it is important to distinguish between a loan and a credit. The Civil Code ( specifically Section 2390) defines a loan as the transfer of an item (typically money) with the expectation that the borrower will return the item of the same kind and quantity. A loan, on the other hand, is regulated by the Consumer Credit Act – it is a situation where the creditor provides funds for a fee and expects to be repaid.
In practice, the terms loan and credit are often used interchangeably, especially in common parlance. However, the difference plays a role in legal disputes – for example, a different regime applies between two individuals than for a bank loan.
Do you need help with drawing up a loan agreement or debt collection? Contact our law firm – we will advise you, draw up a contract and represent you in recovery if necessary.
Loans can be classified according to different aspects:
Private loan between people
This type of loan is usually between acquaintances, family members or friends. The advantages are usually zero or very low interest, flexible terms and minimal administration. On the other hand, it is necessary to be cautious, as unarranged or undocumented rules can lead to disputes, relationship breakdowns and legal problems. Even among loved ones, it is a good idea to have a loan agreement that clearly states the amount, the repayment term and the method of repayment.
Bank loan
Banking institutions provide loans with clearly defined rules and under the supervision of the Czech National Bank. The advantages are reliability, transparency, lower interest rates and the possibility of using calculators directly on the banks’ websites. Thanks to the loan calculator, you can quickly find out the amount of your monthly repayment. Banks assess the applicant’s creditworthiness, income stability and often require proof of purpose for higher amounts.
Non-bank loan
Non-bank companies are not banks, but they can lend money just like them. The advantages are faster approval, less bureaucracy and availability for clients with poorer creditworthiness. On the other hand, you need to read the terms and conditions very carefully, as interest and penalties can be higher. An annuity calculator can help you to discover the actual amount of the total overpayment. When choosing a provider, always check that it is properly licensed by the Czech National Bank.
Tip: Planning to take out a mortgage? Find out what can stop you from doing so. We know the reasons why your bank might say no.
Loan by purpose
For a purpose loan, you need to provide evidence of what you want to use the money for. Typical examples are a mortgage (home loan), car loan or student loan. This has the advantage of a lower interest rate, as the lender can be sure that you will use the money for a specific, less risky purpose. For larger amounts and longer repayments, the calculation of repayments is often based on an annuity. These are regular equal payments that include both principal and interest.
Non-purpose loan
This option does not require proof of purpose. You can use the money for anything from a holiday to a home to paying off another loan. Non-purpose loans tend to be quicker and more flexible, but often carry a higher interest rate. They are more suitable for smaller amounts and shorter repayment periods. Again, you can use a loan calculator to help you work out the monthly burden on your budget.
Secured loan
A secured loan is backed by collateral – for example, a property, a guarantor or other assets. This type of loan carries a lower interest rate because the lender is more certain that the money will be repaid. A typical example is a mortgage or business loan backed by collateral. However, you also bear a higher risk. In the event of default, the lender can sell the collateral to recover the money owed.
An unsecured loan
With an unsecured loan, there is no need to guarantee assets or have a guarantor. The lender relies on your creditworthiness, i.e. your income, your credit report and your repayment history. A common example is a consumer loan or credit card. This type of loan is more affordable but tends to carry a higher interest rate.
Single repayment
This type of loan is less common. It is usually used for short-term loans or loans between people. The whole amount is repayable at once on an agreed date. The advantage is simplicity, the disadvantage can be a high impact expense. This type of loan is usually not suitable for larger amounts or longer periods.
Annuity repayment
This is by far the most common method of repaying loans. Annuity repayment means that you pay the same amount each month – called an annuity. Each instalment changes the ratio between principal and interest, initially you pay more interest and later more principal. Calculating the annuity is important for anyone planning a long-term loan, such as a mortgage or a larger consumer loan. To make calculations easier, it’s ideal to use an annuity calculator that will calculate the exact monthly payments based on the loan amount, interest and term. In practice, the annuity is the most common form of loan and credit repayment.
An annuity means that the client repays the loan in a regular fixed amount (e.g. monthly), which includes both the interest and the amortisation of the principal. In the first instalments, the interest is the larger part, while in the later instalments the principal predominates.
To calculate the amount of the annuity payment, you can use the annuity calculator offered by most banks and financial portals. The calculation is not complicated – it is based on the amount of the loan, the repayment period and the interest rate.
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The law allows you to arrange both an interest and an interest-free loan. Unless interest is explicitly agreed, the loan is considered interest-free.
There are two basic types of interest:
1.Contractual interest: this is set by the lender and borrower in the contract. It can be fixed (e.g. 8% per annum) or variable. Legally, there is no maximum amount, but if it is unreasonable, a court could declare the interest invalid (e.g. usury contract).
2.Default interest: if the borrower does not repay the loan on time, the creditor can charge statutory default interest. The amount is set by the government – currently the CNB repo rate plus 8 percentage points.
If you are borrowing or lending money to someone, draw up a contract. Oral agreements are valid but hard to prove.
The basics:
Available Attorney’s Tip: If you are making a larger loan, we recommend a notarial deed with direct enforceability. This will make it easier for you to collect the debt if necessary.
The loanreceivable does not cease upon the death of the borrower, but passes to his heirs, who are liable for it only up to the amount of the inheritance acquired. If the borrower fails to repay the loan, the creditor can assert his claim, for example, by filing for insolvency proceedings or by applying for foreclosure. In any case, however, they must have proof that the loan actually existed, which again shows how important it is to have a properly drafted and documented contract. If you want to make sure your contract is in order, contact an attorney. Early prevention is always cheaper than pursuing the debt through the courts.
A loan is a common financial instrument, but choosing one requires careful consideration – there is a difference between a loan (Civil Code) and a credit (Consumer Credit Act), which is particularly important in legal disputes. Loans are divided according to the provider (private, bank, non-bank), purpose (purposeful – with proof of use, better interest; non-purposeful – free use, higher interest), collateral (secured – e.g. interest may be contractual or default interest, and if none is agreed, the loan is interest-free. The key is to have a well-drafted loan agreement with clear terms and conditions, including identification of the parties, maturity, interest, penalties and any collateral. The loan passes to heirs and may be subject to foreclosure. Annuity or conventional loan calculators are used to make calculations easier.
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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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