In the current economic context, asset loans have become an essential need for many individuals and enterprises in order to meet consumption, investment, or resolving financial difficulties. We invite readers to follow the article below by NPLaw to gain further insight into the applicable legal regulations on asset loans.

I. Current demand for asset loans

Asset loans constitute a common civil transaction in social life, serving various purposes such as purchasing, investing, doing business, or addressing short-term financial difficulties. The diversity of loan forms and the growth of credit institutions have created favorable conditions for people to access capital sources.

However, asset loans also obtain numerous risks, particularly where the parties are not well informed about the relevant legal regulations. Therefore, understanding the legal provisions on asset loans is extremely necessary.

II. legal regulations on asset loans

1. What is an asset loan?

An asset loan is currently understood as a civil transaction whereby the lender delivers assets to the borrower. The borrower is obliged to return the assets after a specified period, together with interest if so agreed. Assets under a loan contract may include money, movable property, or immovable property.

2. How is the interest rate regulated in an asset loan contract?

Pursuant to Article 468 of the 2015 Civil Code on interest rates:

  • The loan interest rate shall be agreed upon by the parties. Where the parties agree on an interest rate, such rate must not exceed 20% per annum of the loan principal, unless otherwise provided by relevant laws.
  • Where the parties agree on the payment of interest but fail to clearly determine the interest rate and a dispute arises, the interest rate shall be determined as 50% of the maximum interest rate specified in Clause 1 of this Article at the time of repayment.

Accordingly, the loan interest rate shall be agreed by the parties but must not exceed 20% per annum of the loan amount as prescribed above.

3. What contents must be included in an asset loan contract? Which content is the most important? Why?

Some fundamental contents of an asset loan contract include:

  • Information of the parties;
  • Loaned assets and interest rate (if any);
  • Loan term and repayment method;
  • Clauses on handling breaches;
  • Dispute resolution.

Among the above, the loaned assets and interest rate are the most critical contents to which the parties pay particular attention. The loan amount and interest rate form the basis for determining the rights and obligations of the parties in the lending relationship and directly affect the feasibility and legality of the contract.

Nevertheless, when drafting the asset loan contract, the parties should also carefully consider other clauses to ensure fairness and transparency in the transaction, thereby protecting the legitimate rights and interests of the parties and minimizing legal risks during contract execution. 

III. Common questions on asset loans

1. In which cases is the asset loan contract invalid?

Pursuant to Articles 407 and 408 of the Civil Code 2015, the contract shall be invalid in the following cases:

  • Invalid due to violation of prohibitions of law or contravention of social ethics;
  • Invalid due to being a sham transaction;
  • Invalid due to being established or performed by a minor, a person who has lost civil act capacity, a person with cognitive or behavioral control difficulties, or a person with limited civil act capacity;
  • Invalid due to mistake;
  • Invalid due to deception, threat, or coercion;
  • Invalid due to the contracting party being unable to perceive and control his/her acts at the time of establishment;
  • Invalid due to non-compliance with form requirements;
  • Invalid due to an object that cannot be performed.

Accordingly, if falling under any of the above cases, the asset loan contract shall be deemed invalid.

2. Obligations of the parties in the asset loan contract

Pursuant to Articles 465 and 466 of the Civil Code 2015, the obligations of the parties in the asset loan contract are as follows:

The lender:

  • Delivering the assets to the borrower in full, with proper quality and quantity, at the agreed time and place;
  • Compensating the borrower for damages if the lender knows that the assets do not meet quality requirements but fails to inform the borrower, unless the borrower knows and still accepts such assets;
  • Not demanding early repayment of the assets, except in cases specified in Article 470 of the Civil Code or otherwise provided by relevant laws.

The borrower:

  • Where the loaned asset is money, it must pay the full amount upon maturity; where the loaned asset is a movable, it needs to return an asset of the same kind, quantity, and quality, unless otherwise agreed;
  • If the borrower cannot return the movable asset, repayment may be made in money equivalent to the value of the borrowed asset at the place and time of repayment, subject to the lender’s consent;
  • The place of repayment shall be the residence or head office of the lender, unless otherwise agreed;
  • In the case of an interest-free loan, if upon maturity the borrower fails to pay or fully pay the debt, the lender is entitled to claim interest at the rate prescribed in Clause 2 Article 468 of the Civil Code on the overdue amount corresponding to the period of delay, unless otherwise agreed or provided by law;
  • Unless otherwise agreed, in the case of an interest-bearing loan, if upon maturity the borrower fails to pay or full pay the debt, the borrower must pay interest on the overdue principal; if repayment is delayed, the borrower must also pay interest at the rate prescribed in Clause 2 Article 468 of the Civil Code.

Accordingly, both the borrower and the lender must execute their obligations in accordance with the above provisions.

3. How is interest calculated if the borrower fails to pay upon maturity?

Unless otherwise agreed by the parties or provided by law, where the borrower fails to repay upon maturity, the following shall apply:

  • Interest-free loan: The lender is entitled to claim interest at the rate prescribed in Clause 2 Article 468 of the Civil Code on the overdue amount corresponding to the period of delay;
  • Interest-bearing loan: The borrower must pay interest on the overdue principal at the agreed contractual interest rate for the loan term that has expired; in case of delayed repayment, the borrower must also pay interest at the rate prescribed in Clause 2 Article 468 of the Civil Code.

Accordingly, depending on each case, where upon maturity the borrower fails to repay or fully repay the debt, interest shall be imposed in accordance with the above regulations.

IV. Legal consultancy services on asset loans

The above is NPLaw’s article on the current regulations governing asset loans. With a team of experienced lawyers and legal specialists, NPLaw provides reputable and professional legal services, ensuring the best protection of the legitimate rights and interests of our valued clients. Should you require legal assistance, please contact NPLaw for consultation and support.