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.


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.

  1. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ... Read Answer >>
  2. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  3. Is a home equity loan a good way to pay off my credit card debt?

    Learn about the characteristics of a home equity loan and how it can be used to help you pay off your outstanding credit ... Read Answer >>
Related Articles
  1. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  2. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  3. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  4. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  5. Tech

    Good Credit? Try This Credit Card Alternative

    Personal loans are a credit card alternative to try if you've got great credit and you want to lock in a lower interest rate on what you borrow. [underlined word is credit card alternative]
  6. Personal Finance

    The Smartest Way to Tap Your Home Equity

    Using your home as a source of funds can be a smart choice in some situations. Just be sure to run the numbers carefully.
  7. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  8. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  9. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  1. Closed-End Credit

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

    A pre-approved loan between a financial institution and borrower ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Character Loan

    A character loan is a type of unsecured loan that is made on ...
  5. Loan Commitment

    A loan commitment is a loan that may be drawn down or is due ...
  6. Collateral

    Property or other assets that a borrower offers a lender to secure ...
Hot Definitions
  1. Collateral

    Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan ...
  2. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
  3. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  4. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  5. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  6. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
Trading Center