A commitment fee is the amount charged by a lender to keep a specific loan amount available to a borrower. This fee may also be charged for the unused portion of a line of credit. The typical commitment fee begins at 0.25% of the undisbursed loan amount, and can exceed 1.0%. An alternative fee arrangement is for a fixed price to be charged. The lender may require that the fee be paid at the beginning of the prospective loan period. For a line of credit, the fee is usually charged on a periodic basis, based on the average unused balance on the line of credit.
The commitment fee compensates the lender for its risk in keeping a loan available through an agreed-upon period of time (typically one year) without being able to charge interest, despite possible changes in market conditions that might otherwise have resulted in altered loan terms. The fee may also be associated with a commitment to charge a contracted interest rate, rather than the (presumably higher) market interest rate at the time the loan is actually used.