Three Misconceptions About Private Lending

Case 1: Zhao borrowed RMB 100,000 from Lin and issued an IOU. Because Zhao failed to repay the loan on time, Lin sued him in court. During the trial, Zhao argued that the loan was real, but the money had been used by Du, and Lin was aware of this, so Lin should seek repayment from Du. The court found after trial that the loan in question had indeed been used by Du, and that it was only because the lender, Lin, did not trust Du that Lin required Zhao to issue the IOU.

Commentary: From the perspective of private lending practice, an IOU is a document issued by the borrower to the lender upon receipt of the loan, reflecting the nature of a loan contract as a practical contract. Article 5 of the Guiding Opinions on Several Issues Concerning the Trial of Private Lending Dispute Cases issued by the Provincial High People’s Court explicitly provides: “The borrower whose name is signed on the IOU is presumed to be the debtor and has the standing as a defendant.” Therefore, issuing an IOU establishes two facts: the lender has delivered the loan, and the person who issued the IOU is the borrower. In this case, Zhao’s defense that the loan was actually used by another person cannot alter Zhao’s status as the borrower. He must still return the loan to Lin. As for the funds used by another person, he may seek repayment from the actual user based on other legal relationships.

Case 2: Yang borrowed 50,000 yuan from Xu and issued an IOU. When Yang failed to repay the loan in a timely manner, Xu filed a lawsuit against Yang in court. During the trial, Yang argued that Xu was not the actual lender, that the format of the IOU was provided by a third party, Li, that the lender column in the IOU was left blank, and that part of the loan had already been repaid to Li. Xu, however, stated that he did not know Li and had not received any repayment from Yang.

Commentary: In private lending, it is common for loan receipts (IOUs) not to specify the lender, and this case concerns the determination of the lender's identity. Article 4 of the Provincial High People's Court's Guiding Opinions on Several Issues Concerning the Trial of Private Lending Dispute Cases clearly provides: “The party holding debt instruments such as loan receipts is presumed to be the creditor and has the standing as plaintiff.”

In this case, because Yang failed to provide evidence proving that Li was the actual lender, the court ultimately confirmed that the loan contract was established between Xu and Yang, and ruled that Yang should repay Xu the loan of 50,000 yuan. As for the payment Yang made to Li, he may seek its return from Li based on the legal relationship of unjust enrichment.

Case 3: Qian borrowed 20,000 yuan from Wu. In May of this year, Wu filed a lawsuit with the IOU, demanding that Qian repay the 20,000 yuan loan. Qian argued that he had already repaid 10,000 yuan in cash to the intermediary Zhu and therefore owed only 10,000 yuan. The court found upon trial that the loan had indeed been arranged through the intermediary Zhu, but Zhu denied receiving the 10,000 yuan repayment, and Wu also denied having authorized Zhu to collect payment.

Commentary: In this case, Qian failed to provide evidence proving that he had repaid 10,000 yuan, nor was there any evidence showing that Wu had authorized Zhu to collect payment on his behalf. Therefore, Qian's repayment cannot be recognized as repayment of the loan to Wu. Ultimately, the court ruled that Qian must repay Wu the loan of 20,000 yuan.

Advice: To avoid such disputes, the following principles should be adhered to in private lending:

First, the IOU should be written in detail and standardly, including the lender, borrower, and time of borrowing. If there is interest or a guarantor, it should be noted on the IOU. Never sign a blank IOU lightly.

2. Repay loans via bank transfer or request a receipt. If the lender requires repayment through a third party, written authorization is necessary.

3. Stay away from usury. Usurers often evade legal regulations by deducting interest in advance, failing to issue receipts for interest payments, or falsely listing interest rates within legal limits. Therefore, without evidence proving the borrower has paid excessive interest, the borrower must still repay the principal and interest as stipulated in the IOU.

4. If a loan agreement has been signed, the lender should, after delivering the funds, require the borrower to issue a new IOU or provide a supplementary receipt. Otherwise, the loan agreement alone only indicates mutual consent to borrow, not actual disbursement.

5. If the defendant believes the facts differ from those in the lawsuit, they should actively respond and cooperate with the court’s investigation to help the judge uncover discrepancies during the trial.

[5] (FindLaw.cn)