Loan Commitment

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Tandem Loan

    Two loans taken out on one asset, which is usually a house; the ...
  2. Floor Loan

    In real estate construction, the minimum loan that a lender agrees ...
  3. Back-to-Back Commitment

    A commitment to make a second take-out loan that piggybacks another ...
  4. Forward Commitment

    1. A contract pertaining to the future sale or purchase of a ...
  5. Commercial Bank

    A financial institution that provides services, such as accepting ...
  6. Federal Deposit Insurance Corporation ...

    The U.S. corporation insuring deposits in the U.S. against bank ...
Related Articles
  1. Analyzing A Bank's Financial Statements
    Fundamental Analysis

    Analyzing A Bank's Financial Statements

  2. The Evolution Of Banking
    Credit & Loans

    The Evolution Of Banking

  3. Using Economic Capital To Determine ...
    Personal Finance

    Using Economic Capital To Determine ...

  4. How Basel 1 Affected Banks
    Personal Finance

    How Basel 1 Affected Banks

comments powered by Disqus
Hot Definitions
  1. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  3. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  4. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  5. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  6. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
Trading Center