Lending Flashcards
What is the core activity of lending in banking?
Lending involves providing funds by a bank to a borrower under agreed terms, defining the rights, obligations, and remedies of both parties.
What are the two primary types of lending in banking?
Overdrafts: Flexible, short-term credit extended via a current account.
Loans: Fixed sums provided for a defined term, typically with interest.
How do overdrafts differ from loans?
Overdrafts: Revolving credit for general purposes, repayable on demand, often without collateral.
Loans: Fixed sums for specific purposes, structured with repayment schedules, interest, and often secured by collateral.
What is the legal basis for overdrafts?
Banks are not obligated to honour overdrafts unless agreed contractually.
Case: Lloyds Bank plc v Voller (2000): Banks may charge higher interest rates for unauthorized overdrafts.
What does the case Rouse v Bradford Banking Co. (1894) establish about overdrafts?
Overdrafts are typically repayable on demand, giving banks the right to seek immediate repayment.
Can the right to demand repayment of overdrafts be waived?
Yes, exceptions arise if there is an express or implied agreement to waive this right, as seen in Williams & Glyn’s Bank v Barnes (1981).
What is the significance of interest on overdrafts?
Unauthorized overdrafts often attract higher interest rates.
Case: Sempra Metals Ltd v IRC (2008): Interest can be claimed even in the absence of an explicit agreement.
What is a loan’s repayment structure?
Loans are either:
Repayable on demand: No notice required for repayment (Bank of Baroda v Panessar (1987)).
Repayable on specific dates: Defined repayment schedule.
Is there a common law right to early loan repayment?
No, unless the loan agreement explicitly allows for early repayment.
What are variable and fixed interest rates in lending?
Variable Rates: Adjust according to market conditions.
Fixed Rates: Remain constant throughout the loan term.
What is default interest in lending agreements?
Higher interest applied for late payments to incentivize timely repayment.
What role does interest play in lending agreements?
Interest is critical, as confirmed in National Bank of Greece SA v Pinios Shipping Co. (1990), which reinforced its essential role in loan contracts.
What are personal and real securities for loans?
Personal Security: Guarantees by third parties.
Real Security: Mortgages or charges over assets.
What does the Rule in Clayton’s Case (1816) state?
Repayments are presumed to discharge debts in the chronological order they were incurred (“first in, first out”).
Can the Rule in Clayton’s Case be overridden?
Yes, by express contractual terms agreed upon by the parties.
What are the key cases concerning overdrafts?
Lloyds Bank plc v Voller (2000): Allowed higher charges for unauthorized overdrafts.
Office of Fair Trading v Abbey National plc (2009): Overdraft charges did not require fairness assessments under UTCCR 1999.
What legal principle governs repayment of loans on demand?
Case: Bank of Baroda v Panessar (1987): Loans repayable on demand do not require prior notice from the lender.
How do banks ensure the validity of security arrangements?
By complying with legal requirements for enforceable security and addressing challenges raised in case law.
What practical considerations should banks adopt in lending?
Clear terms for repayment and interest provisions.
Safeguards for managing unauthorized overdrafts.
What should borrowers understand before taking loans?
The implications of default interest, repayment terms, and security requirements.
What case confirmed banks’ freedom to set overdraft charges?
Office of Fair Trading v Abbey National plc (2009).
How does freedom of contract apply to lending agreements?
Parties can freely negotiate interest rates, repayment schedules, and collateral terms.
What are the two main types of loan security?
Personal Security: Guarantees.
Real Security: Mortgages and asset charges.
How do compounding interest and default interest differ?
Compounding Interest: Accrues on the principal and previous interest.
Default Interest: Higher rate applied to overdue amounts.