LOAN COMMITMENT
A binding promise from a lender that a loan amount will be drawn down or to be contractually funded at a specified interest rate, certain period, and a certain purpose. Offered by commercial banks and other lending institutions, loan commitment comprises of open-end and closed-end loans. Open-end loan commitments act like revolving lines; if part of the loan is paid, the principal repayment amount is added to the allowed loan limit. On the other hand, close-end loans are subtracted once repayments have been made.
Banks and investment shops should account for the value of unpaid loan commitments so that the funds are available in the event the borrower requests for it. It represent a future obligation in full, even if the borrowers themselves will never be able to utilize a certain percentage of the loan amounts.
Also known as standby loan commitment or commitment letter or firm commitment lending.
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