Given the day-to-day operations of many companies, there are many cash shortages in their day-to-day operations. As a form of financing to cover these temporary cash shortages, financial institutions and companies usually take out a commercial credit policy.
In these policies, there are usually a multitude of somewhat confusing terms that can lead to confusion and, sometimes, banks take advantage of these situations to carry out abusive practices.
Broadly speaking, we should imagine the credit policy as a range that goes, for example, from €0 to €40,000. In other words, the bank provides the company with an “account” or “line of credit” to which the business owner can charge any expenses up to a limit of €40,000 and when the due date arrives (for example, at the end of the month), the company must regularise this “account” to bring it back to €0.
The bank will charge the company a certain nominal interest for the money drawn down during that period (the borrowed money) and, if the company delays the regularisation of the policy (i.e. the return of the borrowed money), it will be charged a late payment interest in addition to the above. So far so good.
But, following the previous example, what happens if one month the company receives an invoice for €70,000?
Well, in these cases, it is possible that the bank will allow the company to charge the invoice to the account linked to the credit policy. But as we can anticipate, there would be an “overdraft” of €30,000.
That is to say, we would have the first €40,000 where the bank would charge us the nominal interest for the money lent and used in that period and, additionally, it could also charge us late payment interest if we take longer than foreseen in the contract to repay that amount.
And what happens with that balance in excess of €30,000? Well, this is where some institutions engage in the abusive practices we were referring to.
In these cases, it is common to see institutions charging us these charges: “interest on overdraft” and/or “commission on overdraft” and even “interest on overdraft for higher debit balance” and/or “commission on overdraft for higher debit balance”. And the question is, are these fees and interest legal? And the answer is, it depends on how our bank applies it.
First of all, it is obvious that the bank is going to charge us some kind of “cost” for the excess amount that it is lending us (in our example the €30,000). So, a priori, the answer is yes, it is legitimate for them to charge us an interest or commission, but the key is that they do not duplicate this cost.
Some entities duplicate the concept and charge an “excess interest” and, additionally, an “excess commission”, therefore, in this case, this practice could be considered abusive for duplicating a cost without it having a correlation with a cost or service provided by the bank.
In other words, the abusivity lies in the legal impossibility of duplicating the levying of the same amounts for the same periods of time through the simultaneous application of interest and overage commission.
Secondly, the fact that these “overage commissions” or “overage interest” are applied to the “higher debit balance” would also be debatable.
In other words, let’s imagine that in a given period (let’s say a month), we have had several overdrafts, one of €5,000 that we regularised the same day, the following week one of €17,000 that took us 10 days to regularise and another of €30,000 that took us three hours to regularise.
Well, in this case, at the end of the month, the bank would take the highest balance due, in this case the €30,000, and would apply the “commission” or “interest” it intends to charge us on that amount, without distinguishing whether we have taken 10 days, 1 day or 3 hours to return the money. This practice leads to the charging of very high amounts without “filtering” the time it has taken to return the excess, and it is therefore debatable whether the “interest” or “commission” applied in this way correlates with a service actually provided by the bank.
If you have any doubts about the possible existence of abusive clauses in a contract, do not hesitate to seek advice as soon as possible to avoid the possible prescription of time limits.
At Navas & Cusí we have a department with lawyers specialised in banking law and contracts where we can advise you. You can call us without any obligation and our specialists will offer you the advice and support you may need.