We can distinguish two types of loans:
- Commodate or loan for usage;
- Mutuum of loan for consumption.
The commodate is the most common type of loan. If you want to read a book I own, you could ask me to lend it to you and once you have finished reading, I got my book back. So we have two basic features of commodate:
- It is temporary;
- it is gratuitous, i.e. without compensation.
Because of feature 2 commodate differs from rent, and because of feature 2 it is different from a gift. The temporary character of the commodate is implied by the obligation of the borrower to return the lent object to the lender.
Due this obligation is often thought that only goods which cannot be consumed could be lent. With consumption we mean any use in which a good ceases to exist in its original form, think of food or fuel. But a book or bicycle can be used without their destruction, hence such goods will exist and hence could be returned to their owner.
Though consumable goods cannot be returned in their original form, it is however possible to lend and borrow such goods. However, in case not the original good but an equal good has to be returned. If I borrow one glass of soy milk from you, I have to give one glass of soy milk back. Such loans are called mutuum.
One could ask what use mutuum loans have. After all the borrower has to obtain after consumption a similar good at his own cost, would not it be better just to buy it in the first place? In many cases this would probably true.
Nevertheless there is one important example of mutuum loans in real life, namely monetary loans. Since people who borrow money do so virtually always to spend it, it would be unreasonable to demand the original money back. Instead returning an equal amount of money is accepted.
Monetary loans are the greatest exceptions to the rule that “loans” are gratuitous. Money is often lent against interest, and we could technically speak of renting money in this case.
The payment of some (small) compensation can however be justified in case of mutuum loans. Unlike the commodate there is an uncertainty whether the borrower will be able to return to borrowed goods. And in case of monetary goods we have to deal with inflation, and if the interest does not exceed the rate of inflation who could state that the loan is gratuitous nevertheless.
Besides monetary loans there is another important application of mutuum contracts: the lending and borrowing of securities (see short selling).
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