Fixed charge

3 key takeaways

• A fixed charge gives the lender a secured interest in a specific asset, providing greater security for the loan.
• The asset under a fixed charge cannot be sold or disposed of by the borrower without the lender’s permission.
• Fixed charges are commonly used for long-term assets such as real estate, machinery, and equipment.

What is a fixed charge?

A fixed charge is a legal claim or lien that a lender has on a specific asset or set of assets as collateral for a loan or other financial obligation. This type of charge provides the lender with a high level of security because the borrower cannot sell, transfer, or otherwise dispose of the asset without the lender’s approval. Fixed charges are often used for tangible assets with long-term value, such as property, machinery, and equipment.

Importance of fixed charges

Security for lenders: Fixed charges offer lenders a higher level of security compared to unsecured loans or floating charges. Since the charge is attached to a specific asset, the lender has a direct claim on that asset if the borrower defaults on the loan.

Lower interest rates: Because fixed charges reduce the lender’s risk, borrowers may benefit from lower interest rates compared to unsecured loans or loans secured by floating charges.

Predictability: Fixed charges provide predictability for both the borrower and the lender. The lender knows exactly which asset is securing the loan, and the borrower understands the restrictions on that asset.

Examples of fixed charges

Mortgages: A mortgage is a common example of a fixed charge, where real estate property is used as collateral for a loan. The property cannot be sold or transferred without the lender’s consent until the mortgage is paid off.

Equipment financing: When businesses finance the purchase of expensive machinery or equipment, these assets can be used as collateral under a fixed charge agreement. The machinery or equipment remains under the lender’s claim until the loan is repaid.

Vehicle loans: Vehicle loans often involve fixed charges, where the vehicle itself serves as collateral. The borrower cannot sell or transfer the vehicle without the lender’s approval until the loan is fully repaid.

Fixed charge vs. floating charge

Fixed charge: As discussed, a fixed charge is attached to specific, identifiable assets. These assets cannot be sold or disposed of without the lender’s consent.

Floating charge: A floating charge, on the other hand, is a general lien on a class of assets that can change over time, such as inventory or receivables. The borrower can manage and dispose of these assets in the ordinary course of business until the charge “crystallizes” (becomes fixed) upon a specific event, such as default.

Legal implications and enforcement

Creation of fixed charge: To create a fixed charge, the borrower and lender must enter into a formal agreement specifying the asset(s) being charged and the terms of the loan. This agreement must be registered with the relevant authorities to be legally enforceable.

Enforcement: If the borrower defaults on the loan, the lender has the right to seize and sell the asset(s) secured by the fixed charge to recover the outstanding debt. This process is generally more straightforward and quicker than enforcing a floating charge.

Priority: In the event of the borrower’s insolvency, fixed charge holders typically have priority over floating charge holders and unsecured creditors in the distribution of the borrower’s assets.

Related topics

To further understand the concept and implications of fixed charges, consider exploring these related topics:

• Secured vs. Unsecured Loans: The differences between loans secured by collateral and those that are not.
• Floating Charge: Understanding how floating charges work and their implications for lenders and borrowers.
• Collateral: The role of collateral in securing loans and the types of assets that can be used.
• Loan Agreements: The components of loan agreements and the legal requirements for creating secured loans.

Fixed charges play a crucial role in providing security for lenders and can offer benefits to borrowers through potentially lower interest rates and better loan terms. Exploring these related topics can provide a deeper understanding of how fixed charges function within the broader context of secured lending and financial agreements.