Loan Commitment
Candlefocus EditorWhat differentiates a loan commitments from other forms of financing is its binding nature. Once the lender offers the loan commitment to the borrower, the loan agreement must be honored by the bank. This is beneficial for borrowers as it ensures the funds will be available for them when needed and prevents sudden changes in loan agreements that can cause financial uncertainty or difficulty for the borrower.
When applying for a loan commitment, the lender will assess the borrower’s creditworthiness and use that assessment to determine whether to issue the loan commitment. A loan commitment can be either secured or unsecured; a secured commitment is based on the borrower’s creditworthiness and is backed by collateral (such as the borrower’s home). An unsecured loan commitment is solely based on the borrower’s creditworthiness and has no collateral backing it.
In addition to evaluating creditworthiness, the lender may request additional documentation including financial statements and proof of security (for secured loan commitments). Once the loan commitment is finalized and the loan is disbursed, the borrower typically must make monthly payments to the lender to pay off the loan.
Loan commitments are a valuable source of financing for businesses and individuals who need additional funds to complete large purchases or to help them get a start in their new home. When used responsibly, loan commitments can help businesses finance their growth and allow individuals to get the funds necessary to achieve their dreams.