A:

Typical requirements for a consumer to qualify for closed-end credit include satisfactory income level and credit history, collateral or equity that meets loan to value standards, and assets.

Closed-end credit refers to loans where the amount loaned is dispersed in full at the time the loan is made, and the loan must be repaid in full, including interest or financing charges, by a specific date or within a specified time frame. The terms of the loan may involve periodic payments over the term of the loan or the entire repayment, including interest, on a specified date. Home mortgages, home equity loans and car loans are examples of closed-end credit arrangements.

Closed-end credit contrasts with open-end credit arrangements such as credit cards or a home equity line of credit.

Collateral

Closed-end credit loans typically involve the use of collateral to secure the loan, such as an individual's home or other real estate to secure a mortgage or home equity loan. The automobile being purchased serves as the collateral for an auto loan.

The collateral used to provide security for a loan must meet the loan to value ratio standards of the lender. For example, banks typically only loan a maximum of 80% of a home's value when making a mortgage or home equity loan. An appraisal is required to determine the current value of real estate.

Ability to Repay

The primary qualification for closed-end credit is the borrower's ability to repay the loan. Therefore, lenders will examine the potential borrower's income and monthly bills to determine if the borrower will likely be able to make the periodic loan payments.

The borrower's credit history and current credit score are also considered. Borrowers with better credit histories and higher credit scores can obtain more favorable loan terms, such as paying a lower interest rate.

Another consideration may be the borrower's total existing assets or net worth. Borrowers with substantial assets are considered a lower credit risk.

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RELATED TERMS
  1. Closed-End Credit

    A loan or extension of credit in which the proceeds are dispersed ...
  2. Open-End Credit

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  5. Lender

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