Loan Commitment

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DEFINITION of 'Loan Commitment'

A loan amount that may be drawn down, or is due to be contractually funded in the future. Loan commitments are found at commercial banks and other lending institutions and consist of both open-end and closed-end loans. Open-end loan commitments act like revolving credit lines, whereby if a portion of the loan is paid off, the principle repayment amount is added back to the allowable loan limit. Closed-end loans are reduced once any repayments are made.

Banks and investment shops must account for the value of outstanding loan commitments so that funds are available should the borrower request them. They represent a future obligation in full, even though a percentage of the notional loan amounts will never be utilized by the borrowers themselves.

Also known as "unfunded loan commitments," because the total capital outlay is not provided by the lender up front.

BREAKING DOWN 'Loan Commitment'

The aggregate loan commitments of commercial banks, savings & loans and investments banks registered in the United States must be disclosed on quarterly financial reports to regulators at the FDIC. These reports are known as the "Call Reports" and can be found either through the FDIC or the lender's corporate website.

Loan commitments get increased attention during times of economic weakness, as more borrowers delay making repayments and may draw down the max on their revolving credit lines. This decreases the return the bank can earn on the capital deployed. The same is true for many construction loans, which are typically classified as closed-end loan commitments.

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