What is a common characteristic of a commitment fee?

A commitment fee is indeed designed to guarantee the borrower a specific interest rate for a specified duration, which is a crucial aspect of loan agreements. This fee acts as compensation for the lender's commitment to allocate funds specifically for the borrower's loan over that agreed-upon time period. By paying the commitment fee, the borrower secures the interest rate they will receive, protecting them against potential rate increases during the commitment period.

In contrast, while a refundable component might seem plausible, commitment fees are generally non-refundable, emphasizing their role in ensuring the borrower can lock in terms without the risk of fluctuating rates. Additionally, commitment fees are not restricted only to secured loans; they can apply to various types of financing arrangements. Lastly, while lenders do have discretion in setting the terms of the commitment fee, variations are typically based on market conditions rather than lender preference alone. Therefore, the defining characteristic of a commitment fee is its role in guaranteeing an interest rate for a specific time frame.