Utilization Fee Definition Example vs Commitment Fee
Utilization Fee: Definition, Example, vs. Commitment Fee
What Is a Utilization Fee?
A utilization fee is a periodic fee that lenders charge borrowers whose outstanding balances exceed a certain percentage of their available credit. Utilization fees are common on revolving lines of credit and term loans for businesses.
Key Takeaways:
– A utilization fee is a periodic fee that lenders charge borrowers in addition to the interest they owe.
– Utilization fees are common with revolving lines of credit and some term loans.
– Utilization fees are triggered when the borrower’s outstanding balance exceeds a certain percentage of their available credit, and they are based on that balance.
– Other fees that may be found in loan contracts include origination fees, commitment fees, and facility fees.
How Utilization Fees Work
Some loans allow borrowers to have access to a certain amount of money without taking it all at once. For example, a line of credit may grant a borrower $20,000, but they might only choose to take $5,000 initially. The borrower will only owe interest on the amount they have outstanding.
Loans with utilization fees impose a charge if the borrower takes out more than a certain amount of money.
Lenders charge utilization fees to create additional revenue and incentivize borrowers to reduce their outstanding balances.
Note: Utilization fees are sometimes referred to as "usage fees" and may be imposed if borrowers exceed a certain percentage of their available credit or if they use too little of it.
Typical Utilization Fee Terms
Loan agreements that involve utilization fees should outline the specific terms.
The terms can vary between lenders and types of credit. Payment may be required annually or quarterly, with the fee based on a quarterly or daily assessment of the borrower’s outstanding balance relative to their available credit line.
Some thresholds for outstanding balances may be set at 33.3% or 50%. Utilization fees can be charged regardless of the percentage of the outstanding balance in some cases.
Other potential charges in lending agreements include origination fees, commitment fees, and facility fees.
Example of a Utilization Fee
Let’s say a business borrower has a $2 million line of credit with a utilization fee clause that sets a 50% threshold. If their outstanding balance exceeds $1 million for three days, they would owe a utilization fee for that period.
What Is an Origination Fee?
An origination fee is a one-time fee charged by the lender at the beginning of a loan. It is typically a percentage of the loan amount. Origination fees are common in installment loans, such as mortgages.
What Is a Commitment Fee?
A commitment fee is charged by lenders in return for making a line of credit available to borrowers. It is based on the unused credit amount. Commitment fees can be flat fees or a percentage of the unused balance.
Business borrowers may not be able to deduct commitment fees as interest but can potentially deduct them as business expenses.
What Is a Facility Fee?
A facility fee compensates the lender for making a predetermined sum of money available to borrowers. It is typically charged on the total facility amount, not just the unused portion.
What Is a Credit Utilization Ratio?
A credit utilization ratio compares the amount of revolving credit a borrower is using to the total amount they have available. It affects credit scores, with lower ratios being favored by scoring formulas and prospective lenders. It is generally advisable to keep credit utilization ratios below 30%.
The Bottom Line
Utilization fees are one of several fees that lenders include in loan agreements. Borrowers should carefully review these contracts and consider more than just the interest rate. By monitoring their outstanding balances and staying below the utilization fee threshold, borrowers may be able to avoid these charges.
