What is a commitment fee?
A commitment fee is a fee that a lender might charge a borrower to whom it has agreed to broaden credit. Generally charged for lines of credit not yet utilized, the commitment fee is an approach to guaranteeing the bank will keep the funds accessible.
More profound definition
Financial institutions in some cases charge a commitment fee since they have agreed to keep a credit extension accessible yet can't charge interest in light of the fact that the borrower hasn't utilized it yet. A few lenders charge a flat fee for keeping a credit extension open, while others charge a percentage of the total loan amount.
Banks might charge the commitment fee just a single time, when the agreement is finished, or they might charge it intermittently, as long as the credit extension stays open. Lenders might charge the commitment fee every year. In the event that they utilize a percentage rather than a flat rate, the amount might go from 0.25 percent to 1.5 percent of the total loan amount.
Financial institutions might require the commitment fee upfront rather than occasionally, and some might refund the commitment fee once the lender completely repays the loan.
Commitment fee model
On the off chance that a bank consents to loan you $500,000 however you haven't taken the money yet, it will probably send you a commitment letter illustrating the complete terms and conditions of the loan agreement. On the off chance that the bank charges a flat fee, it might expect you to pay that fee upfront before you receive any of the loan money.
Notwithstanding, the bank may rather charge a percentage of the total loan amount; for instance, a $500,000 loan with a 0.25 percent commitment fee would total $1,250.
- The cost of a commitment fee will differ contingent upon the lender.
- At the point when a commitment fee happens, it is for a future or undisbursed loan, dissimilar to interest fees, which are calculated in view of a generally spent or borrowed sum.
- Lenders use commitment fees to guarantee they are compensated for guaranteed financial service.
- On the off chance that you are taking out a mortgage loan, commitment fees might be wrapped into closing costs.