A loan for consumption is a contract whereby one party, referred to as the lender, assumes an obligation to entrust the free use of money, foodstuffs, paddy or other fungible objects for a specified term to another party, referred to as the borrower, who assumes the obligation to return objects of the same type, quality and quantity as those received from the lender upon the expiry of the said term. (Article 578, Civil Code) The good example of loan for consumption in contemporary business is money loan.
A loan contract for consumption is formed through the agreement of the lender and the borrower alone. (Article 579, Civil Code) Accordingly,delivery of the object loaned to the borrower is not the legal condition for the formation of such contract. The lender or borrower is entitled to revoke at any time a contract of loan for consumption without interest that is not in writing; provided that this must not apply to any portion of the object of the loan that has been delivered by the lender. (Article 580, Civil Code)
Under the Civil Code, the principal refers to the objects loaned and delivered to the borrower and interest refers to an amount of money or other objects calculated by multiplying a certain percentage by the number of the principal as compensation therefor. The Code requires parties to follow a formative rule under which agreement on payment of interest must be in writing and bear signature of the borrower. (Article 583, Civil Code) The interest rate is determined by law or by agreement of the parties. If the parties have agreed to the payment of interest or if the payment of interest is required by law, and the interest rate has not been specified by the parties, the legal interest rate, which refers to interest rate set forth in the Civil Code (currently 5% per year) or by special law, must apply. The parties can agree on interest rate more than the legal interest rate up to the interest rate limited by law or ordinance (currently 18% per year). (Article 584, Civil Code)
Furthermore, in enforcement of this Article 584 of the Civil Code which requires interest rate not to be more than the interest rate limited by law, money and all other objects other than principal received by the lender in relation to the loan for consumption contract are deemed to be interest,regardless of whether they are described as inducements, rewards, commissions,survey fees or otherwise. However, interest does not include contract execution fees and expenses of repayment.