Loan Commitment

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.

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. Fundamental Analysis

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  2. Credit & Loans

    The Evolution Of Banking

    Banks are a part of ancient history. Find out how this system of money management developed into what we know today.
  3. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  4. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  5. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Economics

    The Truth about Productivity

    Why has labor market productivity slowed sharply around the world in recent years? One of the greatest economic mysteries out there.
  8. Term

    How Market Segments Work

    A market segment is a group of people who share similar qualities.
  9. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  10. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
RELATED FAQS
  1. I know there is a form of deposit insurance where a portion of my bank account deposits ...

    First things first, it's only partially correct to think that a portion of your bank deposits is protected. The Federal Deposit ... Read Full Answer >>
  2. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  3. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  4. Are FHA loans fixed?

    An FHA loan is a mortgage loan backed by the government that offers more flexible lending requirements than those of conventional ... Read Full Answer >>
  5. Can Sallie Mae garnish my wages?

    Private lenders such as Sallie Mae can garnish wages. In the case of federal student loans, the government has the power ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center