COMMITMENT FEE Meaning and
Definition
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A commitment fee is a term commonly used in the financial and business world to refer to a sum of money paid by a borrower to a lender or financial institution to compensate for the lender's promise or commitment to lend a specific amount of money or provide a line of credit.
When a borrower seeks financing or credit facilities from a lender, the lender incurs costs such as administrative, legal, and due diligence expenses, as well as the opportunity cost of committing their funds to the borrower. To ensure that the borrower is serious and to mitigate the risk of the borrower walking away from the deal, the lender may require the payment of a commitment fee.
The commitment fee is typically a percentage of the total loan amount or credit line and is payable upfront or periodically during the commitment period. It is separate from the interest charged on the borrowed funds and is non-refundable in many cases, even if the borrower does not fully utilize the credit facility.
The commitment fee serves multiple purposes. It compensates the lender for incurring costs and potential losses associated with the borrower's commitment, and it incentivizes the borrower to proceed with the loan agreement. Additionally, the commitment fee may also act as a deterrent for borrowers who may otherwise take advantage of the lender's services without following through with the loan or credit arrangement.
Common Misspellings for COMMITMENT FEE
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Etymology of COMMITMENT FEE
The word "commitment fee" is composed of two main parts: "commitment" and "fee".
The term "commitment" is derived from the Middle English word "committment", which was derived from the Latin word "committere". In Latin, "committere" is made up of the prefix "com-" (meaning "together" or "with") and the verb "mittere" (meaning "to send" or "to release"). Therefore, "commitment" refers to a promise or obligation to do something or to dedicate oneself to a specific course of action.
The word "fee" originates from the Old English word "feoh", meaning cattle, money, or property. It evolved to refer more specifically to money paid for services or privileges.
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