Commitment Fee

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DEFINITION of 'Commitment Fee'

A fee charged by a lender to a borrower for an unused credit line or undisbursed loan. A commitment fee is generally specified as a fixed percentage of the undisbursed loan amount. The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in future. The borrower pays the fee in return for the assurance that the lender will supply the loan funds at the specified future date and at the contracted interest rate, regardless of conditions in the financial and credit markets.




BREAKING DOWN 'Commitment Fee'

A commitment fee is different from interest; although, the two are often confused. A commitment fee is separate from the interest rate that is charged by the lender on the loan. A key distinction is that the commitment fee is charged on the undisbursed loan amount, while interest is charged on the disbursed amount of the loan.

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RELATED FAQS
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  4. How would a standby letter of credit be used during an export transaction?

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