Business, Legal & Accounting Glossary
A fee paid by a borrower to a lender in return for the commitment to make funds available.
A commitment fee is a fee that a lender charges a borrower in exchange for keeping a line of credit open. This fee represents the lender’s promise to stick to the loan’s agreed-upon terms, such as specific availability dates and interest rates, regardless of financial market conditions.
A commitment fee is frequently confused with the interest rate charged on a loan; however, they are not the same thing. A commitment fee is assessed on future or unused credit, whereas interest is assessed on loan amounts already disbursed to the borrower.
Commitment costs, as well as explanations of how they were calculated, are frequently stated in commitment letters delivered to borrowers. Lenders frequently base the amount on a percentage of the loan amount. The loan agreement specifies whether the commitment fee must be paid in advance or if it can be reimbursed when the loan is fully repaid. Lenders’ terms and fees differ.
Bank X, for example, charges all borrowers a 0.124 percent commitment fee. If a borrower requests a $500,000 loan, Bank X will send the borrower a commitment letter outlining the loan’s terms and associated expenses. If both parties agree on the terms, the borrower will sign and send the commitment letter, along with a $620 fee payment.
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This glossary post was last updated: 26th January, 2022 | 0 Views.