Legal Definitions - loan commitment

A loan commitment is a formal, binding agreement from a lender (such as a bank or credit union) to provide a borrower with a specific amount of money. This promise typically includes a set interest rate, a timeframe within which the loan must be finalized, and often specifies the purpose for which the funds are intended. Once issued, it legally obligates the lender to provide the financing, provided the borrower meets all the agreed-upon conditions.

Here are some examples to illustrate how a loan commitment works:

• Business Expansion Financing:

  Imagine "InnovateTech Inc.," a growing software company, plans to build a new research and development facility. They apply for a significant loan from "Apex Bank." After reviewing InnovateTech's detailed business plan and financial projections, Apex Bank issues a loan commitment letter. This letter formally states that Apex Bank promises to lend InnovateTech Inc. $10 million at a fixed interest rate of 5.5% for 15 years, specifically for the construction of the new facility. The commitment is contingent on InnovateTech securing all necessary building permits by a certain date.

  This illustrates a loan commitment because Apex Bank has made a binding promise to lend a specified amount ($10 million) at a certain interest rate (5.5%) for a specified purpose (new R&D facility), contingent on InnovateTech meeting the stated conditions. InnovateTech can now proceed with confidence, knowing the funding is secured.

• Personal Vehicle Purchase:

  Sarah wants to purchase a high-value electric vehicle directly from a manufacturer and needs financing. She applies for a personal loan at "Community Credit Union." After evaluating Sarah's credit history and income, Community Credit Union provides her with a loan commitment. This document confirms that the credit union will lend Sarah $80,000 at an interest rate of 4.0% over six years, specifically for the purchase of the electric vehicle, provided she completes the purchase within 90 days and provides proof of sale.

  This is a loan commitment because the credit union has made a binding promise to Sarah for a specific amount ($80,000) at a defined interest rate (4.0%), for a particular purpose (electric vehicle purchase), and within a specified period (90 days), allowing Sarah to finalize her car purchase with assured financing.

• Non-Profit Project Funding:

  "Hopeful Horizons," a non-profit organization, is developing a new community outreach center. They have secured several grants but need a bridge loan to cover initial construction costs before all grant funds are disbursed. "First National Bank" reviews their project and financial needs and issues a loan commitment to Hopeful Horizons for $1.5 million. The commitment specifies an interest rate of 3.2% for a three-year term, with the explicit purpose of funding the construction of the community outreach center. The commitment is conditional on the foundation providing proof of the secured grants and a detailed construction timeline.

  This demonstrates a loan commitment as First National Bank has made a binding promise to provide a specific amount ($1.5 million) at a certain interest rate (3.2%) for a defined purpose (construction of the center), for a specified period (three years), contingent on the foundation fulfilling the outlined conditions. This allows Hopeful Horizons to begin construction without delay, knowing the interim financing is guaranteed.