Loan Commitments, Un -funded lines of Credit and their Characteristics

Loan commitments and unfunded lines of credit are both forms of credit facilities that provide borrowers with access to funds on a future date, subject to certain conditions. Here are their characteristics:

Loan commitments: A loan commitment is a binding agreement between a lender and a borrower, where the lender agrees to provide the borrower with a specified amount of funds on a future date or over a specific period of time. Loan commitments are typically used for long-term borrowing needs, such as for capital expenditures or working capital.

Characteristics of loan commitments include:

The lender is obligated to provide the funds on the agreed-upon date or over the specified period of time, subject to any conditions or restrictions outlined in the agreement.

Interest is typically charged on the outstanding balance of the loan commitment, even if the borrower has not yet drawn down on the facility.

The borrower is not obligated to use all of the funds available under the loan commitment, but may do so at their discretion.

Unfunded lines of credit: An unfunded line of credit is a credit facility that allows a borrower to access funds up to a specified limit, but only as needed and on a revolving basis. Unlike loan commitments, which are typically used for long-term borrowing needs, unfunded lines of credit are generally used for short-term working capital needs.