Loan Commitment

Definition

A Loan Commitment is a formal, legally binding agreement between a borrower and a lender, typically a financial institution, in which the lender promises to provide a set amount of money to the borrower at agreed-upon terms and conditions in the future. The terms may include the loan amount, interest rate, repayment schedule, and any other conditions that must be met before the funds are disbursed.

Loan commitments can take various forms, including revolving credit lines, term loans, and bridge loans. They provide assurance to the borrower that funds will be available when needed, thereby facilitating financial planning and the realization of various projects or transactions.

Examples

Revolving Credit Line: A business arranges a loan commitment for a revolving credit line of $1 million with a bank, allowing them to borrow and repay any amount up to the limit as needed over a specific period.
Mortgage Loan Commitment: A bank issues a loan commitment to a homebuyer, agreeing to lend $300,000 for a property purchase at a fixed interest rate, provided certain conditions, such as an appraisal and income verification, are satisfied.
Bridge Loan: A real estate developer secures a loan commitment for a bridge loan to cover short-term financing needs until a longer-term loan or other form of financing is arranged.

Frequently Asked Questions

What are the different types of loan commitments?

Loan commitments may include revolving credit lines, term loan commitments, bridge loans, and conditional loan commitments, among others.

How long does a loan commitment last?

The duration of a loan commitment can vary; it may be short-term or long-term, depending on the agreement between the lender and the borrower.

What conditions must be met for the loan to be disbursed?

Conditions may include creditworthiness checks, income verification, asset appraisals, and fulfillment of any specific covenants outlined in the loan agreement.

Are loan commitments legally binding?

Yes, loan commitments are legally binding agreements that obligate the lender to provide the loan on agreed terms as long as the borrower meets the specified conditions.

Can a loan commitment expire?

Yes, loan commitments often come with an expiration date. If the loan is not drawn by that date, the commitment may become void.

Revolving Credit Line: A type of credit that allows the borrower to draw, repay, and redraw funds up to a specified limit.
Term Loan: A loan provided for a specific amount and repaid according to a set schedule, typically with fixed or variable interest rates.
Bridge Loan: Short-term financing used until a borrower secures permanent financing or removes an existing obligation.
Interest Rate: The percentage of the loan amount charged by the lender to the borrower for the use of the loan.
Repayment Schedule: The timeline and amounts through which the borrower agrees to repay the loan.

Online Resources

Suggested Books for Further Studies

“The Lending Professionals’ Guide to Loan Documentation” by Angelina Werner
“Principles of Banking” by American Bankers Association
“Loan Agreements: Practical Guide for Lenders and Borrowers” by Richard S. Woodward

Fundamentals of Loan Commitment: Finance Basics Quiz

### What is a loan commitment? - [ ] A promise to give a gift to someone. - [ ] An agreement to repay a loan. - [x] An agreement by a lender to provide a loan in the future. - [ ] A type of savings account. > **Explanation:** A loan commitment is an agreement by a lender to provide a loan to the borrower in the future under specified terms and conditions. ### Which type of loan commitment allows borrowing up to a specified limit and repaying it repeatedly? - [x] Revolving Credit Line - [ ] Term Loan - [ ] Mortgage Loan - [ ] Bridge Loan > **Explanation:** A revolving credit line allows the borrower to repeatedly borrow and repay up to a specified limit. ### What condition might a lender require before disbursing a mortgage loan? - [ ] A lease agreement - [ ] A down payment receipt - [x] An appraisal - [ ] A marriage license > **Explanation:** Lenders often require an appraisal to determine the value of the property before disbursing a mortgage loan. ### How does a bridge loan function? - [x] As short-term financing until longer-term financing is secured - [ ] As permanent financing for real estate purchases - [ ] As a revolving line of credit - [ ] As a grant from the government > **Explanation:** A bridge loan provides short-term financing until longer-term financing can be secured. ### What is typically included in the terms of a loan commitment? - [x] Loan amount, interest rate, repayment schedule - [ ] Name of the loan officer - [ ] Borrower’s shopping list - [ ] Meeting schedule with lender > **Explanation:** The terms of a loan commitment typically include the loan amount, interest rate, and repayment schedule among other conditions. ### Which loan commitment type is best for ongoing cash needs? - [x] Revolving Credit Line - [ ] Term Loan - [ ] Bridge Loan - [ ] Mortgage Loan > **Explanation:** For ongoing cash needs, a revolving credit line is suitable as it allows borrowing up to a limit and repaying repeatedly. ### Can a loan commitment include an expiration date? - [x] Yes - [ ] No - [ ] Only if the borrower requests - [ ] Only if the lender requests > **Explanation:** A loan commitment often includes an expiration date by which the loan must be drawn, failing which the commitment may become void. ### Are loan commitments always legally binding? - [x] Yes, they are legally binding agreements. - [ ] No, they are informal agreements. - [ ] Only if notarized. - [ ] Only for amounts over $1 million. > **Explanation:** Loan commitments are legally binding agreements, obligating the lender to provide the loan under the agreed terms. ### What is the primary function of a loan commitment? - [ ] To increase the borrower’s deposit account - [x] To provide assurance of future financing - [ ] To ensure lender profitability - [ ] To offer a grant to the borrower > **Explanation:** The primary function of a loan commitment is to provide the borrower with assurance of available financing in the future. ### Who typically issues a loan commitment? - [ ] Real estate agents - [x] Financial institutions or banks - [ ] Insurance companies - [ ] Government agencies > **Explanation:** Loan commitments are typically issued by financial institutions or banks.

Thank you for exploring our detailed discussion on loan commitments, complete with challenging quiz questions to solidify your understanding of this essential financial concept. Keep advancing your finance knowledge!