Credit transactions include all transactions involving the

purchase or loan of goods, services, or money in the present with

a promise to pay or deliver in the future.

Secured transactions or contracts of real security. — Those

supported by a collateral or an encumbrance of property;1
and
(b) Unsecured transactions or contracts of personal security.
— Those the fulfillment of which by the principal debtor is
secured or supported only by a promise to pay or the personal
commitment of another such as a guarantor or surety.

Meaning and kinds of security.

The term security is something given, deposited, or serving as
a means to ensure the fulfillment or enforcement of an obligation
or of protecting some interest in property.

Meaning of bailment.

It may be defined as the delivery of property of one person

to another in trust for a specific purpose, with a contract, express
or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it.

Creation of bailment.
In general, bailment may be said to be a contractual relation.
To be legally enforceable, it must contain all the elements of a
valid contract.

Parties in bailment.
The parties to a bailment are the:
(1) Bailor (Comodatario2). — the giver; the party who delivers
the possession or custody of the thing bailed; and
(2) Bailee (Comodante3). — the recipient; the party who
receives the possession or custody of the thing thus delivered.
Kinds of bailment for hire.
Bailment for hire (locatio et conductio) arises when goods are left
with the bailee for some use or service by him and is always for
some compensation. This specie of bailment has been subdivided
as follows:
(1) Hire of things (locatio rei). — where goods are delivered for
the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.);
(2) Hire of service (locatio operis faciendi). — where goods
are delivered for some work or labor upon it by the bailee (i.e.,
contract for a piece of work, Art. 1713.);
(3) Hire for carriage of goods (locatio operis mercium vehendarum).
— where goods are delivered either to a common carrier (Art.
1732.) or to a private person for the purpose of being carried
from place to place (see 6 Am. Jur. 180-182.); and
(4) Hire of custody (locatio custodiae). — where goods are
delivered for storage. (Arts. 1507-1520; Act No. 2137 [The
Warehouse Receipts Law].)

Kinds of contractual bailment.

There are several kinds of bailment creating different rights
and obligations on the part of the bailor and the bailee although
the different kinds are of the same general character. In every
bailment, there is an obligation on the part of the bailee to restore
the subject of the bailment in the same or in altered form or to
account therefor. (Ibid., 189.)
The classifi cation is generally with reference to compensation
under which bailments are divided into three heads, namely:
(1) Those for the sole benefi t of the bailor;
(2) Those for the sole benefi t of the bailee; and
(3) Those for the benefi t of both parties.

ARTICLE 1933. By the contract of loan, one of the parties

delivers to another, either something not consumable
so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition
that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to
pay interest.
In commodatum the bailor retains the ownerships of
the thing loaned, while in simple loan, ownership passes
to the borrower. (

a real contract because the delivery of the thing loaned is

necessary for the perfection of the contract (Art. 1934; see also
Art. 1316.); and
(2) a unilateral contract because once the subject matter has
been delivered, it creates obligations on the part of only one of
the parties, i.e., the borrowe

Cause or consideration in a contract

of loan.
In a contract of loan, the cause is:
(1) as to the borrower, the acquisition of the thing; and
(2) as to the lender, the right to demand its return or its
equivalent.

Kinds of loan.
There are two kinds of loan, namely:
(1) Commodatum. — where the bailor (lender) delivers to the
bailee (borrower) a non-consumable thing so that the latter may
use it for a certain time and return the identical thing; and
(2) Simple loan or mutuum. — where the lender delivers to the
borrower money or other consumable thing upon the condition
that the latter shall pay the same amount of the same kind and
quality.
A thing is consumable when it is consumed when used in a
manner appropriate to its purpose or nature, like rice, gasoline,
money, fruit, fi rewood, etc.r.

Commodatum and mutuum (simple loan)

distinguished.
It is relatively simple to determine whether a given loan is
commodatum or mutuum by bearing in mind the following
principal points of distinction:
(1) Commodatum ordinarily involves something not consumable
(see Art. 1936.), while in mutuum, the subject matter is money
or other consumable thing;
(2) In commodatum, ownership of the thing loaned is retained
by the lender (Art. 1933.), while in mutuum, the ownership is
transferred to the borrower;
(3) Commodatum is essentially gratuitous (ibid.), while
mutuum may be gratuitous or it may be onerous, that is, with
stipulation to pay interest;
(4) In commodatum, the borrower must return the same thing
loaned (ibid.), while in mutuum, the borrower need only pay the
same amount of the same kind and quality;
Art. 1933 LOAN
General Provisions
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
10
(5) Commodatum may involve real or personal property (Art.
1937.), while mutuum refers only to personal property;
(6) Commodatum is a loan for use or temporary possession
(Art. 1935.), while mutuum is a loan for consumption;
(7) In commodatum, the bailor may demand the return of the
thing loaned before the expiration of the term in case of urgent
need (Art. 1946), while in mutuum, the lender may not demand
its return before the lapse of the term agreed upon; and
(8) In commodatum, the loss of the subject matter is suffered
by the bailor since he is the owner (Art. 1942; Art. 1174.), while in
mutuum, the borrower suffers the loss even if caused exclusively
by a fortuitous event and he is not, therefore, discharged from his
duty to pay.
It may also be said that while commodatum is purely personal
in character (see Art. 1939.), mutuum is not so.

Kinds of commodatum.
Commodatum is divided into:
(1) ordinary commodatum (Art. 1933.); and
(2) precarium. — one whereby the bailor may demand the
thing loaned at will.

ART. 1935. The bailee in commodatum acquires the

use of the thing loaned but not its fruits; if any compensation
is to be paid by him who acquires the use, the contract
ceases to be a commodatum. (1941a)
Commodatum essentially gratuitous.
Commodatum is essentially gratuitous. Hence, the contract
ceases to be a commodatum if any compensation is to be paid by
the borrower who acquires the use. In such a case, there arises a
lease contract. (see Arts. 1642, 1643, 1644.)
If the consideration is the rendering of some service, an
innominate contract will result.1

ART. 1954. A contract whereby one person transfers

the ownership of non-fungible things to another with the
obligation on the part of the latter to give things of the
same kind, quantity, and quality shall be considered a barter.
(n)
Mutuum and commodatum distinguished
from barter.
By the contract of barter or exchange, one of the parties binds
himself to give one thing in consideration of the other’s promise
to give another thing. (Art. 1638.)
(1) The distinction between mutuum and barter lies in the
subject matter. In the former, it is money or any other fungible
things; in the latter, non-fungible (non-consumable) things.
(2) In commodatum, the bailee is bound to return the identical
thing borrowed when the time has expired or the purpose has
been served. In barter, the equivalent thing is given in return for
what has been received.
(3) Mutuum may be gratuitous and commodatum is always
gratuitous. (Art. 1933, pars. 2, 3.) Barter, on the other hand, is an
onerous contract. It is really a mutual sale.
Obligations of the Bailee

Liability for ordinary expenses.

 It is logical that the borrower should defray the expenses

for the use and preservation of the thing loaned for after all, he
acquires the use of the same, and he is supposed to return the
identical thing.

 the borrower must take good care of the thing with

the diligence of a good father of a family.

ART. 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event

Usury defi ned.

Usury may be defined as contracting for or receiving something
in excess of the amount allowed by law for the loan or for-bearance of money,
goods or chattels. (Tolentino vs. Gonzales, 50
Phil. 558 [1927].)

When compound interest allowed.

Compound interest (which is interest on interest) is allowed

only in two cases:

(1) when there is an express written stipulation to that effect

(see Art. 1959, Civil Code.) or, in default thereof;

(2) upon judicial demand and this is so even if the contract

be silent upon this point. (see Art. 2212,8 ibid., supra.) The debtor
is not liable to pay compound interest even after judicial demand
where there is no stipulation for the payment of interest.
The compounding of interest may be annually, semi-annually,
or monthly depending on the agreement.

Right under the Civil Code.

Article 1413 of the Civil Code, reads as follows:
“Interest paid in excess of the interest allowed by the
usury law may be recovered by the debtor, with interest
thereon from the date of the payment.”
Under the above-quoted provisions, it would seem that only
the interest in excess of that allowed by the Usury Law should
be returned. Has Section 6 of the Usury Law been amended by
Article 1413 of the Civil Code? The Civil Code is inconsistent
on the matter. While under Articles 1175 and 1957 (supra.), the
Usury Law shall govern. Article 1961 (supra.) is to the effect that
the Usury Law and special laws are applicable only “so far as
they are not inconsistent with this Code.”
However, in a case (Angel Jose Merchandising vs. Chelda
Enterprises and D. Syjueco, 23 SCRA 119 [1968].), the Supreme
Court ruled that the person paying usurious interest can recover
not only the interest in excess of 12% or 14%,11 as the case may be,
but the entire interest paid. Since a stipulation for the payment
of usurious interest is void. (Arts. 1957, 1409[7], Civil Code.),
the effect is the same as if there is no stipulation as to interest.
(Art. 1956.) In another case (Sanchez vs. Buenviaje, 126 SCRA
208 [1983].), however, the Supreme Court allowed the creditor to

recover the principal loaned plus interest thereon at the legal rate
from the fi ling of the complaint.
The debtor is entitled to recover the interest paid with legal
interest from the date of payment. (see Capule vs. De la Cruz, 10
C.A. Rep. 119.)

interest defined.
Interest is the compensation allowed by law or fi xed by the
parties for the loan or forbearance of money, goods or credits.

Kinds of interest.
They are the following:
(1) Simple interest. — that which is paid for the principal at a
certain rate fi xed or stipulated by the parties (

(2) Compound interest. — that which is imposed upon interest

due and unpaid. The accrued interest is added to the principal
sum and the whole (principal and accrued interest) is treated as
a new principal upon which the interest for the next period is
calculated (

Legal interest. — that which the law directs to be charged

in the absence of any agreement as to the rate between the parties.
(Art. 2209, ibid.) Thus, as provided in Section 1, the rate collectible
is 6% per annum. The same rate is allowed in judgments when
there is no express contract between the parties in anticipation of
the same. The interest is computed from the time of the rendition
of the trial court’s, not of the appellate court’s decision. (

Lawful interest. — that which the law allows or does not

prohibit, that is, the rate of interest within the maximum prescribed
by law

Unlawful or usurious interest. — that which is paid or

stipulated to be paid beyond the maximum fi xed by law

Interest rates.
Under the Usury Law, they are:
(1) Legal rate. — 12% per annum
(2) Maximum rate. —
(a) 12% per annum, if loan is secured in whole or in part
by a mortgage upon real estate with a Torrens title (Sec. 2.); or
any agreement conveying such real estate (also registered) or
an interest therein. For purposes of the ceiling, loans secured
by government securities such as treasury bills, Central Bank
certifi cates of indebtedness, etc. qualify as secured loans.
(b) 14% per annum, if the loan is not secured as above
stated (Sec. 3.); or
(c) that prescribed by the Monetary Board of the Central
Bank. This allows for more fl exible interest rate ceilings.
Note: Central Bank Circular No. 817 (July 21, 1981) fi xed the
effective rates of interest as follows:
(1) not exceeding 16% per annum, including commissions,
premiums, fees, and other charges for secured loans of 365 days
or less;
(2) not exceeding 18% per annum, if such loans are unsecured;
and
(3) if the maturity of the loan is more than 365 days, the
interest shall not be subject to any ceiling.

ART. 1962. A deposit is constituted from the moment

a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract

Characteristics of the contract.

(1) It is a real contract like commodatum and mutuum because
it is perfected by the delivery of the subject matter.
(2) When the deposit is gratuitous, it is a unilateral contract
because only the depositary (depositorio) has an obligation. But
when the deposit is for compensation, the juridical relation
created becomes bilateral because it gives rise to obligations on
the part of both the depositary and depositor (depositante).

Deposit distinguished from mutuum.

The distinctions are as follows:
(1) In deposit, the principal purpose is safekeeping or mere
custody, while in mutuum, the consumption of the subject matter;
(2) In deposit, the depositor can demand the return of the
subject matter at will, while in mutuum, the lender must wait
until the expiration of the period granted to the debtor; and
(3) In deposit, both movable and immovable property may
be the object, while in mutuum, only money and any other
fungible thing.
Deposit distinguished from commodatum.
The following are the distinctions:
(1) In deposit, the principal purpose is safekeeping, while in
commodatum, the transfer of the use;
(2) Deposit may be gratuitous, while commodatum is essentially
and always gratuitous; and
(3) In (extrajudicial) deposit, only movable (corporeal)
things may be the object, while in commodatum, both movable
and immovable property may be the object.

Kinds of deposit.
Deposit is either:
(1) judicial or one which takes place when an attachment or
seizure of property in litigation is ordered (Arts. 2005-2008.); or
(2) extrajudicial (Art. 1967.) which may be;
(a) voluntary or one wherein the delivery is made by
the will of the depositor or by two or more persons each of
whom believes himself entitled to the thing deposited (Arts.
1968-1995.); or
Arts. 1963-1964 DEPOSIT
Deposit in General and Its Different Kinds
COMMENTS AND CASES ON CREDIT
TRANSACTIONS
108
(b) necessary or one made in compliance with a legal obligation,
or on the occasion of any calamity, or by travellers in
hotels and inns (Arts. 1996-2004.) or by travellers with common
carriers. (Arts. 1734-1735.

ART. 2005. A judicial deposit or sequestration takes

place when an attachment or seizure of property in litigation
is ordered. (1785)
ART. 2006. Movable as well as immovable property
may be the object of sequestration. (1786)
ART. 2007. The depositary of property or objects
sequestrated cannot be relieved of his responsibility until
the controversy which gave rise thereto has come to an
end, unless the court so orders. (1787a)
ART. 2008. The depositary of property sequestrated
is bound to comply, with respect to the same, with all the
obligations of a good father of a family. (1788)
When judicial deposit takes place.
A deposit may be constituted judicially or extrajudicially.
(Art. 1964.)
Judicial deposit or sequestration takes place when an attachment
or seizure of property in litigation is ordered by a court.1 (Art.
2005.) For example, properties may be attached by the sheriff
upon the fi ling of a complaint (Rule 57, Rules of Court.), or a