Commitment Fee

Is there now a commitment fee you have to pay when you promise not to go out with other people? Fortunately...no.

A commitment fee is charged by a lender when they go through the time and trouble of offering you a line of credit or loan, and you haven’t used it yet. Since they can’t start charging you interest and they have set aside these funds for your use, they would like to be compensated. The fee could be a flat rate or a percentage of the loan amount, and the lender will then agree to keep the line of credit open, or will supply the loan at a later date at the agreed upon interest rate.

The commitment fee is usually paid at the closing of the loan (when you give your final signature) and the bank might continue to charge fees on unused portions of the available funds in an open line of credit. To calculate, they would take the average amount of the unused funds and multiply that by the commitment fee rate times the number of days in the quarter. And if you decide not to take out the loan at all after you applied, you will still have to pay a one-time commitment fee. After all, it’s a lot of work for a bank to check your credit score, debt-to-income ratio, etc., and they like to be paid for their time.

Before you take out any type of loan, it’s always a good idea to find out how much these commitment fees will be, and how often they plan to charge them. Then compare them with what other banks or credit unions would charge.