What in the World is a Commitment Fee?
Imagine you’re standing at the magical gates of a mythical treasure vault that’s guarded by a dragon. You know you might never need the treasure, but you want to be sure you can grab it if you ever find yourself in an epic battle. The catch? You have to slip a gold coin (or a few) under the dragon’s watchful eye every day to keep the door ajar. Welcome to the enchanting world of the commitment fee!
In the not-so-mythical world of finance, a commitment fee is that gold coin you pay the bank—a fee charged to keep open a line of credit or to continue to make available those unused loan facilities.
How Does it Work?🪄
Picture this: you’re the owner of a flourishing gnome emporium, and you’ve secured a line of credit to expand your gnome armory. You haven’t dipped into this line of credit yet because, well, business is good, and the gnomes are behaving. Instead of just letting that line of credit idle in the corner, the bank charges you a commitment fee to ‘keep the line warm,’ so to speak.
They usually calculate this fee annually, based on something fancy called ‘basis points’ (one basis point equals 0.01 percent). Expect to see charges on the
