Private loans are known in legal terms as loan contracts.
According to Article 1142 of the Civil Code (hereinafter referred to as the C.C.), “A loan is a contract whereby one party lends the other money or another fungible thing, the latter being obliged to return another of the same kind and quality.”.
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As for the form that these contacts must take, according to Article 1143 of the Civil Code we can be faced with three different situations, which will be affected by the amount of the loan.
Thus, if the amount is equal to or less than €2,500.00 (two thousand five hundred euros), it does not need to be in writing.
If the amount is more than €2,500.00 (two thousand five hundred euros) and up to €25,000.00 (twenty-five thousand euros), the contract must take the form of a written and signed document.
Finally, if the value exceeds €25,000.00 (twenty-five thousand euros), it will only be valid if it is done by public deed (before a Notary) or by notarized private document (before a Lawyer or Solicitor).
In order to dispel any doubts and safeguard the loan, it is always advisable, even if the loan agreement is for an amount equal to or less than €2,500.00 (two thousand five hundred euros), to have the signatures recognized in accordance with the law.
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If the above formalities have not been complied with, the legal consequence will be the nullity of the loan and, consequently, the repayment by the borrower of what has been lent, under the terms of Article 289(1) of the Civil Code. (“Both the declaration of nullity and the annulment of the transaction have retroactive effect, and all that has been lent must be repaid or, if repayment in kind is not possible, the corresponding amount”).
With regard to the question of the consequences of the nullity of the loan contract due to lack of form in relation to the agreed interest paid, the specific case must be analyzed, with reference, on the one hand, to the Judgment of the Supreme Court of Justice, handed down in case 89/16.0T8VGS.P1. S2, dated 31-01-2019, which ruled that “Once a fact has been demonstrated that legally subsumes the recognition that the borrowers are in good faith, restitution to the lender must consider that the amounts already paid by the borrowers, as interest, must be charged to the capital, since any amount paid as interest is unjustified, underlining that the declaration of nullity of the onerous loan necessarily affects the interest agreement, It is also important, and in this way, that the required restitution covers the capital still missing, to be calculated, once subtracted from the value of the loan, all the proven amount, delivered by the borrowers to the lender, regardless of the title to which it was made, especially by way of interest, and the amount delivered by way of interest must be recognized as a delivery, by way of capital", and, on the other hand, the Judgment of the Coimbra Court of Appeal, handed down in the context of case 2943/13. 2TVLRA. C1, dated 30-06-2015, which ruled that “However, in the case of a loan in which, despite its nullity, the borrower paid the agreed interest for around seven years, without ever questioning this obligation and the validity of the contract, it would be abusive to exercise the claim for restitution of this interest, by virtue of the nullity that has been declared, as it corresponds to a venire contra factum propium and defrauds the legitimate expectations of the lender and the trust that the borrower's previous behavior merited.”
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Continuing on the subject of interest, Article 1145(1) of the Civil Code states that “The parties may agree to the payment of interest as consideration for the loan; the loan is presumed to be onerous in case of doubt”.
In turn, paragraph 2 of the aforementioned article stipulates that, as far as interest is concerned, the provisions of article 559 of the C.C. must be observed, i.e. that interest stipulated without determining the rate will be that set by a joint decree of the Ministers of Justice and Finance and Planning - currently decree no. 291/2003, of April 8, which sets interest from May 1, 2003 at 4%, and that the stipulation of interest at a higher rate must be made in writing.
It should be noted that interest rates higher than the current 4% are limited to 3% or 5%, depending on whether or not there is a real guarantee (e.g. mortgage or pledge) (see Article 1146(1) of the Civil Code).
If interest rates higher than those mentioned are stipulated (i.e. currently 7% or 9%, whether or not there is a real guarantee), they will be reduced to the maximum permitted, and the respective loan contract will also be considered usurious, in accordance with the provisions of art. 559-A, no. 1 of 1146, both of the C.C., and art. 226 of the Penal Code (of which its n. 1 stands out). Article 226 (1) of the Penal Code, according to which “Whoever, with the intention of achieving a pecuniary benefit for himself or for another person, exploits a situation of need, psychic anomaly, incapacity, ineptitude, inexperience or weakness of character of the debtor, or a relationship of dependence on him, causes the debtor to grant or promise, in any form whatsoever, in his favor or in favor of another person, a pecuniary advantage which is, according to the circumstances of the case, manifestly disproportionate to the consideration, shall be punished with imprisonment for up to 2 years or a fine of up to 240 days. “).
Finally, with regard to default interest, i.e. interest due in the event of late payment within the agreed deadlines, the maximum rate will be 7% or 9%, depending on whether or not there is a real guarantee (see Article 1145(2) and Article 1146(2), both of the Civil Code).
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With regard to the fulfillment of the loan agreement, if there is a deadline set for this purpose, the borrower may anticipate payment, provided that he pays the interest due in full (see Article 1147 of the Civil Code).
On the other hand, if no deadline is set, in the case of a free loan (with no agreed interest payment), the borrower must be notified/intervoked to do so 30 days in advance, or, in the case of an onerous loan (with agreed interest payment), either party may terminate it, provided that the termination is made 30 days in advance (see Article 1148(1) and (2) of the Civil Code).
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Having said this, we cannot fail to point out that prior advice and careful drafting of the respective documents will be a key point in safeguarding the position of both parties, first and foremost to safeguard against any future problems relating to breach of contract, particularly in the judicial phase, and by reference to the means of proof, and this should not be done lightly.
On the other hand, the borrower's ability to meet his obligations should be analyzed in order to minimize the risk of default.
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