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What is a loan commitment?
A finishing step in the borrowing process that confirms your approval.
Loan commitments come after you’ve compared lenders and applied for a loan. Once your lender offers a loan commitment, you’ll be on your way to getting the funding you need. But it can look different based on what you’re applying for — here’s what you should know when you receive one.
What is a loan commitment?
A loan commitment is a guarantee given to borrowers that a lender has approved them for a loan, line of credit or credit card. It outlines the terms and conditions of borrowing, including potential fees and payback terms.
Loan commitment vs. loan preapproval
Receiving a loan commitment means you’re fully approved to borrow, and only need to agree to the terms to receive your funds.
Preapproval, or prequalification, means you met the basic criteria, but the lender will still need to check your credit and confirm your income. At this point, you may still be denied.
How does a loan commitment work?
Loan commitments can take two forms: close- or open-ended.
- Open-ended loan commitment. Also called a revolving loan commitment, this is a guarantee that the lender will continue to provide funds up to your credit limit as you pay down what you borrow. This can take the form of a line of credit, HELOC or credit card.
- Close-ended loan commitment. A close-ended loan commitment is the opposite: You receive a lump sum and can only use those funds once. If you need more, you have to apply again. This can take the form of a student loan, car loan, personal loan or mortgage.
Both types of loan commitments can be secured or unsecured. For example, a HELOC is a revolving loan commitment secured by your home, which is used as collateral. A student loan is a non-revolving loan commitment that doesn’t require you to provide collateral.
Approval for any type of loan is based on your credit, income, current debt and other requirements set by your lender.
What happens after I receive a loan commitment?
Once you agree to a loan commitment — whether that takes the form of a loan, line of credit or credit card — and sign your loan documents, you can use your funds to cover a variety of expenses. But while the loan commitment may outline the amount you’re set to borrow and pay back, your loan contract will provide other necessary details to guide how you use your funds.
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