Feeling Loanly?

The majority of what is called a “loan” today has nothing to do with lending. Lending involves the giving of something and receiving that same thing back in return. I can loan my pen to my friend, but I cannot lend my sandwich qua food to him. With the previous post in mind, let’s break it down.

A loan contract involves transferring the use of something to another party while maintaining ownership. It establishes the rights of the borrower to make use of the object without providing the right to dispose of the being of the object. At the end of the contract, the borrower is obliged by the ownership of the lender to return it to the possession of the lender and consequently return the use of the thing.

A contract that is analogous to a loan but specifically different transfers the use and the thing itself to another party. In return, the receiving party gives the promise of return of the thing in kind rather than the thing itself. This transfers the ownership of the thing to the receiving party while granting the former owner the authority to demand a return in kind.

These are essentially different terms in that they establish formally different systems of rights, obligations and authority. In the loan contract, only use is transferred where the lender maintains his authority over the object as his property, relinquishing for a time authority over its use. In the second contract, the former owner transfers the ownership of thing itself, both use and being, to the recipient in reception of a promise of a return in kind. This second contract is a mutuum contract, rather than a loan.

We might consider the slightly different contract, where instead of a promise a claim against property some property is given. This property acts as collateral backing the original promise to return in kind at the end of the contract. The authority that is established is that the former owner can take the collateralized property as a return in kind if necessary. However, this again is essentially different from a loan strictly speaking, but is analogous in that it is a return in kind.


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