What is a 'Commitment Fee'

A commitment fee is a banking term used to describe a fee charged by a lender to a borrower to compensate the lender for its commitment to lend. Commitment fees typically are associated with unused credit lines or undisbursed loans. The lender is compensated for providing access to a potential loan through a commitment fee, since it has set aside the funds for the borrower and cannot yet charge interest.

BREAKING DOWN 'Commitment Fee'

A commitment fee generally is specified as either a flat fee or 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 the future. The borrower pays the fee in return for the assurance 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.

Legal Qualification of a Commitment Fee

Legally, a commitment fee is different from interest, although the two often are confused. The key distinction between the two is that a commitment fee is calculated on the undisbursed loan amount while interest charges are calculated by applying an interest rate on the amount of the loan that has been disbursed and not yet repaid.

Interest also is charged, and paid, periodically. A commitment fee, on the other hand, often is paid as a one-time fee at the closing of the financing transaction. A further commitment fee may be charged by a lender at the renewal of credit facilities. In the case of open lines of credit, a periodic commitment fee may be charged on the unused portion of the available funds.

In most cases, if the borrower decides not to move forward with the loan, the commitment fee still is payable to the lender.

Calculating a Commitment Fee

In the case of a one-time loan, the commitment fee is negotiated between the lender and the borrower. The fee can be a flat amount, such as $1,000, or a percentage of the loan amount, such as 1%.

For an open line of credit, a formula is used to calculate the average available amount of credit on a periodic basis, often quarterly. The fee is then calculated by multiplying the average unused commitment by the agreed-upon commitment fee rate and again by the number of days in the reference period.

RELATED TERMS
  1. Committed Credit Line

    When a financial institution offers a loan balance called a committed ...
  2. Loan Application Fee

    A loan application fee is a fee charged to a potential borrower ...
  3. Stock Loan Fee

    A stock loan fee, or borrow fee, is a fee charged by a brokerage ...
  4. Committed Facility

    A committed facility is a credit facility whereby terms and conditions ...
  5. Back-to-Back Commitment

    A back-to-back commitment is a commitment to make a second take-out ...
  6. Garbage Fees

    Garbage fees are unnecessary fees tacked onto closing costs by ...
Related Articles
  1. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  2. Investing

    Everything You Know About Investor Fees

    Investment fees are one of the main determinants of investment returns, and over time, minimizing fees tends to maximize performance. Use this guide today.
  3. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  4. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  5. Personal Finance

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
  6. Personal Finance

    The 4 Worst Ways To Borrow Money

    While there are less risky places from which to borrow, there are also predatory lenders who can make your financial situation worse than it was to begin with.
  7. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  8. IPF - Mortgage

    How to Get the Best Mortgage Rate

    A crucial consideration as you shop mortgages is getting the best possible interest rate.
  9. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
  10. IPF - Mortgage

    What Are the Main Types of Mortgage Lenders?

    Shopping for a mortgage lender can feel confusing and a little intimidating. Understanding the differences among the main types of lenders can help you narrow down the field.
RELATED FAQS
  1. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
Trading Center