Definition - What does Commitment Fee mean?
A commitment fee is a charge that a lender imposes on a borrower as compensation for keeping a line of credit open. This fee represents the lender's promise to adhere to the agreed-upon terms of the loan, such as specific dates of availability and rates of interest, regardless of financial market conditions.
A commitment fee is often confused with the interest rates charged on a loan; however, they are different. A commitment fee is charged on future or unused credit while interest is charged on loan amounts that have already been disbursed to the borrower.
Divestopedia explains Commitment Fee
Commitment fees, as well as explanations as to how the fees were determined, are typically stated in the commitment letters that are sent to borrowers. Lenders often base the amount on a percentage of the loan. The specific terms of the loan agreement outline whether the commitment fee must be paid upfront or if the fee may be refunded upon complete repayment of the loan. Terms and fees vary among lenders.
For example, Bank X requires all borrowers to pay a 0.124% commitment fee. If a borrower wishes to take out a loan of $500,000, Bank X will send a commitment letter to the borrower, specifying the terms of the loan and its related fees. If agreement on said terms is mutual, the borrower will sign and return the commitment letter along with a fee payment of $620.
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