how utilization fees work
some loans are structured in a way that makes a certain amount of money available to the borrower but the borrower doesn t have to take it all at once in a lump sum a line of credit is one example a borrower might be granted a line of credit for say 20 000 but take only 5 000 at the outset that leaves them another 15 000 to draw from as needed in the future the borrower will only owe interest on the amount of debt they have outstanding at any given point loans with a utilization fee impose an additional charge typically if the borrower takes out more than a certain amount of money the reason is that lenders are counting on their borrowers as a group not to max out on their loans because of the capital demands that would put on the lender if all of their borrowers used nearly the full amount of the credit that s available to them lenders could be strained to come up with the money by charging utilization fees a lender can create another stream of revenue to sustain its operations while also giving borrowers an incentive to reduce or eliminate their outstanding balances in order to avoid paying these costs utilization fees are sometimes referred to as usage fees depending on the loan contract usage fees may be imposed not only if a borrower exceeds a certain percentage of their available credit but if they use too little of it 1typical utilization fee termsif a loan or other form of credit involves utilization fees that and any other fees should be spelled out in the lending agreement the specific terms can vary from one lender to another and according to the type of credit in question payment may be required annually or quarterly with the fee based on a quarterly or even daily assessment of the borrower s outstanding balance relative to their available credit line some clauses set the threshold for the outstanding balance at 33 3 of the total commitment while others may set it at 50 before any utilization fees will be triggered in some cases utilization fees can be charged against the outstanding balance regardless of the percentage it represents other potential charges that may be part of lending agreements include origination fees commitment fees and facility fees example of a utilization feesay a business borrower has a 2 million line of credit with a utilization fee clause that sets a 50 threshold and that for three days their outstanding balance exceeded 1 million under many loan contracts they would owe a utilization fee based on that period if their outstanding balance remained below the threshold for the entire time they would generally not owe a utilization fee at all 