Regulations on loan contracts and legal risks to be aware of

In addition to sale and purchase contracts, asset loan contracts – especially money loan contracts – are among the most common types of civil contracts today. However, not everyone fully understands their legal nature and the potential risks involved. In fact, parties only become aware of these risks once a dispute arises. In this article, TNTP’s lawyers will analyze the legal regulations on asset loan contracts and the legal risks that businesses and individuals should take into consideration.

1.Concept of asset loan contract

According to Article 463 of the 2015 Civil Code, an asset loan contract is an arrangement between two parties, according to which the lender transfers the asset to the borrower, who is obligated to return the asset upon due, along with interest if so agreed or as provided by law.

2.Legal provisions related to the loan contract

(i) Subject and quantity of the loaned asset

• According to Article 105 of the 2015 Civil Code, assets include objects, money, valuable papers, property rights, real estate, and movable estate.
• In practice, the most popular asset for loaning is money due to its liquidity, ease of calculation, and no need for revaluation.
• In addition to the subject, the quantity of loaned assets is a mandatory term in the contract, especially for money loan contracts, where the exact amount must be clearly stated.

(ii) Purpose of the loan

• According to Article 467 of the Civil Code 2015, the borrower is obligated to use assets for the agreed purpose. In case of violation, the lender has the right to recover the assets prior to maturity and request compensation or fines (if stipulated in the contract).
• Borrowers often have defined purposes – such as business financing, debt repayment, or investment, etc. Accordingly, lenders should clearly understand the purpose of the borrower to assess the repayment ability.

(iii) Loan term

• According to Article 278 of the 2015 Civil Code, the parties may mutually agree on the loan term. Upon maturity, the borrower is obligated to return the asset and pay interest (if any).
• If the borrower fails to perform or improperly perform their obligation, the lender has the right to apply legal measures to protect their rights.

(iv) Interest rate

• Interest is an important element in a loan contract. It is the lender’s source of income and the borrower’s financial cost.
• According to Clause 2, Article 357 and Article 468 of the 2015 Civil Code, and Precedent No. 09/2016/AL, if no specific agreement exists, overdue interest shall be calculated based on the average overdue interest rates of at least three local banks, not exceeding 10%/year. If the agreed rate exceeds this cap, the excess portion shall be invalid.

3.Legal risks in loan agreements

In an asset loan contract, if there are no detailed provisions or unclear regulations, certain risks may occur, affecting the legal rights and interests of the borrower or lender.

(i) Subject and quantity of the loaned asset

• Undefined repayment obligations: If the asset type is not specified (money, specific goods, etc), disputes may arise regarding repayment obligations.
• Difficulty in enforcement: In the event of a dispute, the competent authority may struggle to determine the scope of the borrower’s obligations.
• Risks of depreciation or changes in asset characteristics: For physical assets, if the quantity, type, or quality is not clearly defined, the borrower may return incorrect assets or cause difficulties in valuing the assets when handling violations.

(ii) Purpose of the loan

• No mechanic for handling when the borrower misuses the purpose: Without a specified loan purpose, the lender cannot request early recovery of the property according to Article 467 of the 2015 Civil Code.
• Increased risk of default or insolvency: Not knowing the purpose of the loan prevents the lender from properly assessing risk.
• Hard to apply penalties: It is impossible to apply penalties for violations or request compensation if the violation cannot be determined.

(iii)Loan term

• Disputes over repayment timing: If there is no specific deadline, it can be considered as “indefinite”, only paid when the lender requests, leading to conflicts.
• Difficulty in calculating interest and handling violations: The time of late interest and measures to handle violations will not be clear.
• Impacts on lender’s financial planning: Lenders cannot forecast asset recovery timing, affecting their cash flow and financial operations.

(iv) Interest rate

• Default legal interest rates may apply: Without an agreement, the interest rate for overdue debts is set by law—which may be lower than the lender’s expectation.
• Agreements exceeding the legal limit may be invalidated: If interest rates exceed the legal cap (currently 20%/year under the Civil Code as of 2025), the excess may be declared invalid – causing a loss of a part of the lawful income.

4.Risk Mitigation Measures

To limit risks, a loan contract should clearly state the subject and quantity of the loaned asset, the purpose of the loan, the loan term, and the interest rate (if any). It is advisable to include clauses on penalties, compensation, and early recovery if the borrower violates. The contract should be executed in writing and signed by both parties to ensure validity and ease of proof in case of disputes.

In conclusion, asset loan contracts are a common form of transaction but have significant legal risks if the parties do not fully understand the law or are careless during drafting and execution. Creating a well-structured contract with comprehensive provisions and appropriate safeguards is an effective way to reduce disputes and protect the legitimate rights of the parties involved.

Above is the article: “Regulations on loan contracts and legal risks to be aware of”, is compiled by TNTP’s lawyers. We hope this article provides useful insights to our valued readers

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