Drawing on a previous contribution to overdrafts, this article focuses on fixed-term loans. A fixed-term loan essentially offers a lump sum agreed over a period of time, usually referred to as a “term,” which requires payment at or until the end of the maturity. These loans usually have a term of more than one year and will often last more than five years. Commitment fees can be paid for a temporary loan, as these are promised facilities. Commitment fees are calculated as a percentage of unused funds that the lender must maintain linked to the borrower from time to time. The fee covers the costs incurred by the lender in making funds available for that loan, which it cannot lend to others. In addition, it may be possible for the borrower to repay all or part of the credit in advance if there is sufficient notice (i.e. before the dates indicated in the repayment plan), for example because he may no longer need as much money as he borrowed it first. It may be necessary to pay a royalty to the lender to compensate it for lost interest that the lender would have received if the money had not yet been available; this is called the “deposit tax”. The use of tranches offers the borrower some flexibility, which can be further increased if the maturity credit allows the borrower to obtain money in different currencies. The interest on a temporary loan is likely lower than the interest paid for an overdraft and is set either at a fixed rate or more often at an amount (known as a “Margin”) higher than libor (London Interbank Offered Rate). In the case of a fixed-term loan, the borrower is usually allowed to perform a short execution period during which he can claim funds. This is called the “availability period”.
Additional funds may be used in stages or “tranches”, as agreed under the Loan Facility and at the discretion of the borrower. Each tranche has its own pre-agreed conditions, which must be met, and a period of availability of its own. If no funding is used during the corresponding availability period, these funds are no longer available and the commitment is automatically cancelled. The use of tranches gives the borrower greater flexibility and control over the amount of money borrowed and therefore the amount of interest paid. A fixed-term credit gives the borrower the guarantee of a fixed repayment plan. This contrasts with the on-demand character of an overdraft. Fixed-term loans are usually promised facilities. A “promised” facility is a facility in which, after the conclusion of the facility contract, the lender is required to send money when requested by the borrower, subject to the borrower`s compliance with certain pre-agreed terms.
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