Bank loans lent to others, hurting feelings and losing interest.
Compiled from: Tancheng County People's Court
Recently, the Tancheng County People's Court concluded a private lending dispute case. The plaintiff borrowed money from a bank and lent it to the defendant. When suing for repayment, the court ruled their loan contract invalid and did not support the claim for agreed interest, resulting in the plaintiff receiving far less interest from lending to others than the interest he paid on the bank loan.
Case review
Lu and Yan were friends. Due to financial difficulties, Lu borrowed money from Yan, but Yan had no funds to lend. Lu then asked Yan to take out a bank loan for his use. Out of obligation, Yan obtained a 59,900 yuan loan through the bank's "quick loan" on June 20, 2021, and transferred the amount to Lu on the same day. Lu issued an IOU to Yan stating: Lu borrowed 59,900 yuan from Yan for working capital, with interest calculated based on the bank's "quick loan" interest rate, and the loan term from June 20, 2021, to April 20, 2022. Yan transferred the funds from the bank's "quick loan" special account to Lu's account. After the loan matured, despite repeated demands from Yan, Lu refused to repay, citing lack of funds. Yan had no choice but to sue in court.
The Tancheng Court held that legal private lending relationships are protected by law, but if funds obtained from financial institutions are reloaned, the people's court shall deem the lending contract invalid. In this case, the loan in question was obtained by Yan from a bank, not from his own funds, constituting a reloan of funds obtained from a financial institution, so the loan contract between Yan and Lu should be invalid. After the contract is invalidated, property obtained under the contract shall be returned. The party at fault shall compensate the other party for losses incurred; if both parties are at fault, each shall bear corresponding responsibility. Since both Lu and Yan were at fault for the invalidity of the loan contract, both should bear corresponding responsibility. Considering the fault of both parties and loan costs, Lu should repay the principal to Yan and pay a usage fee based on the one-year loan prime rate published by the National Interbank Funding Center at the time of Lu's lawsuit, calculated from the date of the loan.
Court judgment
Lu shall return the principal of 59,900 yuan to Yan; compensate Yan for interest losses, with the principal of 59,900 yuan as the base, interest losses from June 20, 2021, to June 15, 2022, calculated at an annual rate of 4.35%; and interest from June 16, 2022, until full repayment, calculated according to the one-year loan prime rate (LPR) standard published by the National Interbank Funding Center authorized by the People's Bank of China. After the judgment, neither party appealed, and the judgment has taken legal effect.
Civil Code of the People's Republic of China
Article 157
After a civil legal act is invalid, revoked, or determined to have no effect, the property obtained by the actor through the act shall be returned; if return is impossible or unnecessary, compensation shall be made at a discounted price. The party at fault shall compensate the other party for losses incurred; if all parties are at fault, each shall bear corresponding responsibility. If the law provides otherwise, those provisions shall apply.
Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases
Article 13
Under any of the following circumstances, the people's court shall deem the private lending contract invalid:
(1) Reloaning funds obtained from financial institutions.
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[1] The author's perspective
Within the scope prescribed by law, the legitimate rights and interests of the lender are protected by law, but those that exceed the legal bottom line are not within the scope of legal protection. When lending funds, the lender should use their own lawful funds. The borrower should also actively verify the lender's funds when borrowing; if the borrower knowingly borrows funds obtained by defrauding financial institutions, they are also at fault for the invalidity of the loan contract.
In this case, Yan defrauded financial institutions of funds and reloaned them to others. Although the loan contract between him and Lu is invalid, it does not affect the validity of the loan contract between Yan and the bank. Therefore, Yan must still fulfill the obligations under the loan contract, such as repaying on time, paying interest and liquidated damages, and may even face the risk of being sued and having a bad credit record.
More notably, if the relender, with the intent to profit from loans, defrauds financial institutions of credit funds and reloans them at high interest, once the illegal amount is substantial, it is likely to constitute a crime and bear criminal liability.
