Why do lenders charge a commitment fee?

A commitment fee is typically charged by lenders as a means to discourage borrowers from withdrawing their applications. This fee helps to ensure that the borrower maintains their commitment to go through with the financing process, providing the lender with some assurance that the loan will be executed as planned.

When a borrower applies for a loan, the lender sets aside capital in anticipation of that loan being funded. This creates opportunity costs for the lender, as those funds could be allocated elsewhere if the borrower were to withdraw their application. By implementing a commitment fee, lenders can offset these costs and encourage the borrower to follow through with their application, thereby maintaining the integrity of the loan commitment process.

The other options focus on different aspects of loan processing but do not accurately define the primary purpose of a commitment fee. For instance, while loan servicing costs and collateral may be relevant in the overall lending process, they do not specifically relate to the function of the commitment fee in securing the borrower’s intention to complete the loan agreement.