Unused line fee: Overview, definition, and example
What is an unused line fee?
An unused line fee is a fee charged by a lender to a borrower on a line of credit for the portion of the credit line that remains unused. For example, if a business has a revolving line of credit with a $100,000 limit but only borrows $50,000, the lender may charge a fee on the remaining $50,000 that was not drawn upon. The unused line fee is typically calculated as a percentage of the unused portion of the credit line and is intended to compensate the lender for keeping the credit available to the borrower. These fees are common in revolving credit agreements, such as business lines of credit or credit cards, to incentivize the borrower to use the credit and help cover the costs associated with maintaining the credit facility.
For example, a company with a $500,000 line of credit that uses $200,000 might be charged an unused line fee of 0.5% on the remaining $300,000.
Why is an unused line fee important?
An unused line fee is important because it provides a way for lenders to compensate for the availability of unused credit. Maintaining a line of credit, especially large ones, involves administrative costs, liquidity management, and risk exposure. The fee helps the lender offset these costs and can incentivize the borrower to use more of the available credit. For borrowers, it encourages them to either draw on the credit line or consider reducing the credit limit to avoid paying the fee. From a business standpoint, understanding the potential costs associated with unused lines of credit is essential for effective financial management.
Understanding unused line fee through an example
Let’s say a business has a $250,000 line of credit with an unused line fee of 1% annually. If the business only draws $100,000 over the course of a year, the unused portion of the credit line is $150,000. The lender will charge the business a fee of 1% on the $150,000, which equals $1,500. This fee is assessed regardless of whether the business uses the remaining credit, and it is typically paid on a regular basis, such as quarterly or annually.
In another example, a borrower with a personal credit line might have a $10,000 credit limit but only use $2,000. If the lender charges a 0.25% unused line fee, the borrower would owe $20 for the unused $8,000 portion of the credit line.
An example of an unused line fee clause
Here’s how an unused line fee clause might appear in a credit agreement:
“The Borrower agrees to pay an unused line fee of [insert percentage]% per annum on the portion of the credit line that remains unused, calculated based on the average daily unused balance for each calendar quarter. This fee shall be payable quarterly in arrears.”
Conclusion
An unused line fee is a fee that lenders charge borrowers for the portion of a line of credit that is not being used. It serves to compensate the lender for maintaining available credit and managing the associated risks and costs. For borrowers, it is important to be aware of unused line fees when managing credit facilities, as they can add up over time if large portions of the credit line remain unused. This fee encourages more active use of the credit line or, alternatively, may prompt borrowers to reduce their credit limit to avoid unnecessary charges.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.