Variable interest rate precedent — Optional clause

Variable interest rate precedent — Optional clause

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This document is a variable interest rate clause. It is designed to be inserted into a loan agreement. The defined terms in this clause have the same meaning as those in the precedent called “Basic loan agreement”.

Interest rates

When dealing with loan agreements between individuals (whether corporate or human) it is often the case that the interest rate is fixed for the sake of simplicity. However, when dealing with financial institutions, a variable interest rate offering is more common as it gives the lender flexibility to be competitive in the loan market or to adapt quickly to an adverse change to its cost of funds.

Cost of funds is the interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers.

Variable interest terms

This precedent clause provides terms for variable interest found in loan agreements. Importantly, the lender must be given the right to vary interest rates as flexibly as possible.

Although there are no specific regulations which cap the rate of interest, it is prudent for a lender to consider whether interest to be charged could be considered usurious by Australian courts.

Related precedents

  • Basic loan agreement
  • Guarantee of payment of loan
  • General security deed

This document has been authored for Lexis Nexis by Elise Margow, Principal, Legally Speaking.

This document is prepared with the assistance of Specialist Editors Geoff Geha, Partner, Clayton Utz and Karen Lee, Principal and Consultant, Legal Know-How.