The significant changes in the Civil Code regarding loan contracts, compared to the old law, are mainly reflected in Articles 679 and 680. A summary is provided below: ①

I. Between natural persons, a loan contract is "formed" rather than "effective" when the lender provides the loan. The formation and effectiveness of a contract are issues of different natures and categories.

The formation of a contract falls under the category of contract formation, addressing whether the contract exists—a factual determination. The effectiveness of a contract falls under the category of contract validity, addressing whether an existing contract complies with legal provisions and possesses legal effect—a legal determination. Contract formation is a prerequisite for determining contract effectiveness. Only after a contract is formed can its effectiveness be considered. In other words, only contracts that meet the conditions for effectiveness after formation receive legal protection. Contracts that do not meet the conditions for effectiveness, although formed and possibly reflecting a factual economic relationship between the parties, are not only unprotected by law but may also be subject to legal sanctions. The legal effect of contract formation is that the offeror cannot withdraw the offer, and the offeree cannot withdraw the acceptance. However, the rights and obligations of the offeror and offeree are still not legally recognized, and the rights and obligations in the contract remain uncertain. If a formed contract is subsequently invalid or revoked, although formed, the stipulated rights and obligations are not binding on the parties. The legal effect of contract effectiveness is different; effectiveness is a positive legal evaluation of the parties' expressions of intent. The parties' expressions of intent comply with the national will; therefore, the rights and obligations set by the parties are protected by state coercion. Loan contracts between natural persons are practical contracts; the characteristics of such contracts include agreement and delivery of the subject matter or completion of other payment obligations as constituent elements.

Article 210 of the Contract Law, stipulating that loan contracts between natural persons take effect upon the lender providing the loan, is unscientific. Therefore, the lender's payment obligation is only a pre-contract obligation; its breach does not create a breach of contract liability but may constitute a fault in contracting. II. Usury is invalid.

This Civil Code adds the provision: "Usury is prohibited; the interest rate on a loan must not violate relevant state regulations."

Previous regulations were at the departmental rule level, lacking clear provisions at the legal and administrative regulation levels. After the implementation of the Civil Code, there is a clear legal basis for determining the invalidity of usurious loan contracts. Of course, if such contracts do not involve other invalid circumstances, they should be considered partially invalid contracts; that is, the part of the interest rate agreement exceeding state regulations is invalid, while the loan contract itself and the part of the interest rate that does not exceed state regulations remain valid. Therefore, after the implementation of the Civil Code, usury carries the risk of criminal liability—possibly constituting the crime of illegal business operations (for professional lenders) and fraud (for predatory lending)—and the possibility of the loan contract being deemed partially invalid. In addition, Article 211, paragraph 2, of the Contract Law stipulates: "In loan contracts between natural persons that stipulate the payment of interest, the interest rate on the loan must not violate relevant state regulations limiting loan interest rates." The Civil Code has also amended this, and the regulation of usury is no longer limited to natural persons; financial institutions and other non-financial institutions are also included in this provision. Of course, what constitutes a violation of "relevant state regulations" on loan interest rates remains unclear. Although the Supreme Court's judicial interpretation on private lending sets the loan interest rate at 24% and 36%, this regulation does not apply to financial institutions, and whether the judicial interpretation has the authority to set loan interest rates is also questionable. Therefore, the Civil Code's provisions on loan interest rates require further clarification. III. Changes in interest rate stipulations The first scenario is where the loan contract does not stipulate interest. Article 211 of the Contract Law stipulates: "In loan contracts between natural persons where the payment of interest is not agreed upon or is unclear, it is deemed that no interest is payable." The Civil Code has amended this, no longer distinguishing between whether both parties are units or individuals, or whether the lender is a financial institution. That is, even if one party is a unit, if the loan contract does not stipulate interest, it is still deemed that no interest is payable. This provision of the Civil Code obviously incorporates the reasonable content of the Supreme Court's judicial interpretation on private lending, Article 25, paragraph 1, of which states: "If the borrower and lender have not agreed on interest, and the lender claims payment of interest during the loan period, the people's court will not support it." However, the judicial interpretation does not cover financial institutions;

the Civil Code expands this provision to all units, including banks and other financial institutions. This requires that if the lender intends for the other party to pay interest, they must not only stipulate interest in the loan contract but also clearly stipulate the interest rate to avoid damage to their rights in case of disputes.

The second scenario is where the loan contract stipulates interest but the interest rate is unclear. The Civil Code stipulates: If the payment of interest is unclear in a loan contract, 'and the parties cannot reach a supplementary agreement, the interest shall be determined according to local or parties’ transaction methods, customs, and market interest rates; for loans between natural persons, it shall be deemed that there is no interest.' Therefore, in this scenario, a distinction must be made as to whether there are legal persons and other organizations among the parties. If both parties are natural persons, it is still deemed that there is no interest. If one or both parties are units, and no supplementary agreement on the interest rate can be reached, the interest shall be determined according to the local or the parties’ transaction methods, customs, and market interest rates; that is, in this case, the court enjoys certain discretionary power.

Appendix: Legal Articles Part III Contracts Part II Typical Contracts

Chapter XII Loan Contracts

Article 667 [Definition of Loan Contract]               A loan contract is a contract where the borrower borrows money

'from the lender, repaying the loan and paying interest at maturity.'

Article 668 [Form and Content of Loan Contract]

Loan contracts shall be in writing 借款合同是借款人向贷款人借款,到期返还借款并支付利息的合同。

第六百六十八条　【借款合同形式和内容】借款合同应当采用书面形式 Except where otherwise agreed upon between natural persons, a loan contract generally includes clauses on the type of loan, currency, purpose, amount, interest rate, term, and repayment method.

Article 669: Obligation of the Borrower to Provide True Information Establishing a loan contract The borrower shall provide true information on business activities and financial status related to the loan as required by the lender.

Article 670: Loan Interest Shall Not Be Deducted in Advance Loan interest shall not be deducted from the principal in advance. If interest is deducted from the principal in advance, the loan shall be repaid according to the actual amount borrowed, and interest shall be calculated.

Article 671: Consequences of the Lender Failing to Provide the Loan as Agreed or the Borrower Failing to Receive the Loan as Agreed If the lender fails to provide the loan in accordance with the agreed date and amount, and causes losses to the borrower, compensation shall be paid for the losses. If the borrower fails to receive the loan in accordance with the agreed date and amount, interest shall be paid according to the agreed date and amount.

Article 672: Lender's Right to Supervision and Inspection The lender may inspect and supervise the use of the loan as agreed. The borrower shall provide relevant financial and accounting statements or other information to the lender regularly as agreed.

Article 673: Liability of the Borrower for Using the Loan for Purposes Other Than Agreed If the borrower uses the loan for purposes other than those agreed upon, the lender may stop disbursing the loan, recover the loan in advance, or terminate the contract.

Article 674: Term for the Borrower to Pay Interest The borrower shall pay interest within the agreed term. If the term for paying interest is not agreed upon or is unclear, and cannot be determined according to the provisions of Article 510 of this Law, if the loan period is less than one year, it shall be paid together with the repayment of the loan; if the loan period is more than one year, it shall be paid at the end of each year, and if the remaining period is less than one year, it shall be paid together with the repayment of the loan.

Article 675: Term for the Borrower to Repay the Loan The borrower shall repay the loan within the agreed term. If the loan term is not agreed upon or is unclear, and cannot be determined according to the provisions of Article 510 of this Law, the borrower may repay at any time; the lender may urge the borrower to repay within a reasonable time.

Article 676: Liability of the Borrower for Overdue Repayment of the Loan If the borrower fails to repay the loan within the agreed term, overdue interest shall be paid according to the agreement or relevant national regulations.

Article 677: Borrower's Prepayment of Loan If the borrower repays the loan in advance, unless otherwise agreed by the parties, interest shall be calculated according to the actual loan period.

Article 678: Loan Extension The borrower may apply to the lender for an extension before the repayment deadline ; if the lender agrees, the loan may be extended.

Article 679: Time of Establishment of Loan Contract Between Natural Persons A loan contract between natural persons is established when the lender provides the loan.

Article 680: Prohibition of Usury and Determination of Loan Interest Usury is prohibited The interest rate on loans shall not violate relevant national regulations. If the loan contract does not stipulate the payment of interest, it shall be deemed that there is no interest. If the loan contract is unclear on the payment of interest, and the parties cannot reach a supplementary agreement, the interest shall be determined according to the local or parties’ transaction method, transaction habits, market interest rates, etc.; for loans between natural persons, it shall be deemed that there is no interest.