What Is a Draw Fee on a Loan or Line of Credit?

Defining a Draw Fee

A draw fee represents a charge imposed by a lender each time a borrower accesses funds from an available credit facility. This fee is distinct from other common borrowing costs, such as interest charged on the outstanding balance, upfront origination fees for establishing the credit line, or recurring annual maintenance fees. Its purpose is to cover the administrative expenses lenders incur when processing individual requests for funds. Lenders levy draw fees to offset the operational costs associated with verifying the draw request, disbursing the funds, and updating the borrower’s account records.

Where Draw Fees are Applied

Draw fees are commonly encountered in credit products designed for staged or intermittent funding. Home Equity Lines of Credit (HELOCs) frequently feature draw fees, where the borrower can access funds as needed up to a predetermined limit. Each instance of withdrawing money from the HELOC can trigger a draw fee.

Construction loans also typically involve draw fees, as funds are disbursed in stages linked to the completion of specific project milestones. Each of these disbursements, or “draws,” often incurs a fee to the borrower. Certain business lines of credit, particularly those designed for fluctuating working capital needs, may also include draw fees.

How Draw Fees are Structured

Draw fees can be structured in several ways. One common structure is a flat fee per draw, where a fixed amount, such as $25 to $100, is charged each time funds are accessed. This flat fee remains constant regardless of the amount of money drawn in that particular transaction.

Another prevalent structure is a percentage of the amount drawn. Under this model, the fee is calculated as a small percentage, often ranging from 0.25% to 1.0% of the funds disbursed in each draw. Some credit facilities may also incorporate an annual fee that permits multiple draws within that year without incurring additional per-draw charges, effectively bundling the cost.

Impact on Borrowers

Draw fees significantly impact the overall cost of borrowing, extending beyond just the interest rate. These fees accumulate with each access of funds, increasing the total expense of utilizing a line of credit or loan. Borrowers must consider how frequently they anticipate drawing funds, as frequent draws can quickly escalate the total fees paid over the life of the credit facility.

Understanding these fees is important for effective financial planning and budgeting. A credit product with a seemingly low interest rate might become more expensive than anticipated if it includes substantial draw fees and the borrower expects to make multiple small draws. Therefore, when comparing different loan or credit options, borrowers should not only look at interest rates but also meticulously examine all associated costs, including any draw fees.