A loan commitment or a loan pre-approval is a promise that an individual can get a loan. In order to get a loan commitment, the borrower needs to get a loan commitment letter and the lender needs to check his credit history. Moreover, there are different kinds of loan commitments available, and the borrower needs to determine which one he wants to take.
Loan commitment is an agreement between the commercial bank or other financial institution and a business or individual for a specific sum given for a specific period of time. This loan commitment can be disbursed in full at one time or the borrower can draw the money as and when needed. Moreover, loan commitments can be either secured or unsecured whereas secured commitments are given on the basis of the creditworthiness of the borrower and require some form of collateral. However, unsecured loan commitment is given solely on the basis of the creditworthiness of the borrower. Some examples of open ended secured loan commitments can be home equity line of credit (HELOC) wherein equity is used as collateral. On the other hand, an unsecured credit card can be an example of unsecured loan commitment. The interest rate in an unsecured loan commitment is higher than the secured one.
The sum of money received from loan commitment can be used by an individual or business to either purchase a property or to purchase a business. There are different kinds of loan commitments available such as revolving loan commitments, secured and unsecured loan commitments, non-revolving credit agreements and others and a borrower can choose the one he wants based on his convenience. Thus, it can be said that loan commitment ensures inflow of cash that can help the borrower to reach his objectives be it purchasing a property or developing a business. Open end loan commitments are hijgly flexible and are helpful for paying sjort term debt. These loan commitments have low interest rates. On the other hand, secured loan commitments can help an individual or business to improve their credit worthiness. However, one downside to secured loans is that if an individual is unable to pay the loan then their collateral may be forfeited.
