What is a commitment fee in the context of lending?

A commitment fee is indeed charged to guarantee a certain loan interest rate and terms over a specified period, such as when a borrower secures a line of credit or a loan but has not yet drawn down the funds. This fee compensates the lender for reserving a portion of their capital for the borrower, ensuring that the borrower can access the funds at the agreed-upon rates and conditions when needed. It essentially reflects the lender's commitment to providing that capital, which might be tied up and unavailable for other potential borrowers.

Other options relate to different aspects of lending. The fee for early repayment is associated with charges that a lender might impose if a borrower pays off their loan ahead of schedule, which can lead to a loss of interest income for the lender. A late payment fee penalizes borrowers who do not adhere to the repayment schedule, thus encouraging timely payments. Lastly, a fee for improving creditworthiness is generally not a standard practice in borrowing arrangements, as creditworthiness typically derives from the borrower's financial health and history rather than a fee charged by the lender.