Thu | Oct 18, 2018

A commitment to the transaction

Published:Sunday | June 7, 2015 | 12:00 AMChad Bryan

There are various fees attached to accessing a car loan, which the borrower may not be aware of until going into the financial institution. In helping you to be more prepared to make the very significant step of acquiring a motor vehicle, today, Automotives demystifies the commitment fee.

A commitment fee is a relatively small (to the amount of money changing hands) charge imposed by a lender when a loan is being extended to an applicant. This is not applicable only to motor vehicles.

The fee serves as a sign that the lender - a bank, for example - is pledging their resources to enter into the business arrangement with the borrower.

According to the Banker's Handbook on Credit Risk, this fee is charged from the time of acceptance of the commitment until drawdown/issuance and on the unused portion of the commitment.

A commitment fee varies according to the risk associated with the type of loan being made.

It is possible for the fee to range to up to two per cent of the loan amount.

Different institutions will have individual approaches to the commitment fee. Scotiabank Jamaica Limited, one of the numerous institutions in Jamaica which offer motor vehicle loans, told Automotives that "contrary to market practice, we do not have an isolated commitment fee attached to our loans. Instead, all our charges are combined into what we refer to as our internal processing fee".

To them, the processing fee represents a combination of the application fee, commitment fee, letter of undertaking, toll and postal stamp cost applicable to mailing their promissory notes.

"This fee represents the handling charges applicable to the processing of the customer's loan application," Scotiabank said.

According to the bank, the internal processing fee applicable to car loans amount to 3.535 per cent.

"This percentage cost remains constant, regardless of the loan amount. As it relates to car loans, our internal processing fee represents an upfront cost to the customer, unlike our unsecured loan facilities. At the discussion stage of our loan application, the fees are discussed with customers and expressed both in percentages and dollars, to ensure transparency and full disclosure prior to accepting a loan application," the bank stated.