Definition of user fees

What is a user fee?

User fees are regular, periodic fees assessed by a lender against a borrower. The fees are based on the amount of credit actually used by a borrower in a revolving line of credit or term loan.

Usage fees explained

The fees are based on the actual amount of funds used from a line of credit or term loan. The borrower must pay user fees, in addition to other fees, under the terms of the line of credit or term loan. User fees may be charged by lenders, especially when borrowers access a large portion of their line of credit or loan because of the capital requirements that such activity places on the borrower.

If all borrowers used almost all of the balance at their disposal, lenders might be forced to meet demand consistently. By charging user fees, a lender can create a flow of capital to support its operations, while also providing incentives for borrowers to reduce or eliminate their outstanding balances in order to avoid paying these costs.

How user fees are applied

The terms of user fees may vary depending on the lender and the type of credit or loan used. For example, a user fee clause may require the borrower to pay an amount based on the average total outstanding amount if that outstanding amount is greater than a certain percentage of the daily average total obligation.

Key points to remember

  • User fees are periodic charges that are assessed regularly against a borrower by a lender of a term loan or revolving line of credit.
  • The amount of the fee depends on the amount of credit (or funds) borrowed.
  • User fees are part of the loan terms as issued by the creditor or lender.
  • User fees are often charged by lenders when borrowers use a large portion of their line of credit or loan.

Some clauses set the threshold at 33.3% of the total commitment, others can set it at 50% before the user fees are triggered. User fees can even be charged on the outstanding balance regardless of the percentage over the total extent of the line of credit or loan.

User fees and their terms may vary depending on the type of credit or loan used and the lender.

Payment could be annual, but the fee could be based on a quarterly or even daily assessment of the outstanding amount. The fee could be calculated by charging the borrower for a specified interval during which the outstanding balance was greater than a defined threshold against the entire line of credit.

So, if a borrower has a $ 2 million line of credit with a user fee clause with a 50% threshold, and for three days the outstanding balance exceeds $ 1 million, they will incur charges. use based on this period. If the outstanding balance remains below this threshold, the borrower may not have to pay a user fee, at least at the same rate.

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