What is a 'Closed-End Credit'

Closed-end credit is a loan or type of credit where the funds are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date. The loan may require regular principal and interest payments, or it may require the full payment of principal at maturity.

BREAKING DOWN 'Closed-End Credit'

Generally, real estate and auto loans are closed-end credit, but home-equity lines of credit and credit cards are revolving lines of credit or open-end. Many financial institutions refer to closed-end credit as an installment loan or a secured loan. Financial institutions, banks and credit unions offer closed-end credit.

Closed-end credit is an agreement between a lender and borrower or business. The lender and borrower agree to the amount borrowed, the loan amount, the interest rate and the monthly payment, which depend on the borrower's credit rating. Obtaining closed-end credit is an effective way to establish a good credit rating and demonstrates that the borrower is creditworthy.

Closed-end credit allows borrowers to buy expensive items and pay for the items in the future, such as a mortgage, auto, boat, furniture or appliances. Unlike open-end credit, closed-end credit does not revolve or offer available credit. In addition, the loan terms cannot be modified.

Interest Rates

The interest rate and monthly payments are fixed. However, the interest rates and terms vary by company and industry. The interest rates are lower than open-end credit interest rates. Interest accrues daily on the outstanding balance. Although most closed-end credit loans offer fixed interest rates, a mortgage loan can offer either a fixed or a variable interest rate.

Approval

Borrowers must inform the lender of the purpose of the loan. In some instances, the lender may require a down payment. For example, a lender approves a customer with a credit score of 700 for an auto loan for 48 months with a monthly payment of $300 at a 4% interest rate with zero down payment.

Payment

Some lenders may charge a prepayment penalty if a loan is paid before the due date. The lender assesses penalty fees if payments are not made by the specified due date. If the borrower defaults on the loan payments, the lender can repossess the property.

A longer loan term means that the borrower pays more in interest charges over time. For certain loans, such as an auto, mortgage or boat loans, the lender retains the title until the loan is paid in full. After the loan is paid, the lender transfers the title to the owner.

Secured vs. Unsecured

Closed-end credit offers secured and unsecured loans. Closed-end secured loans offer faster approval and require collateral to secure or protect the loan from default. Loan terms for unsecured loans are generally shorter than secured loans.

RELATED TERMS
  1. Open-End Credit

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

    A character loan is a type of unsecured loan that is made on ...
  3. Car Title Loan

    A short-term loan in which the borrower's car title is used as ...
  4. Renegotiated Loan

    The result of an agreement between a borrower and a lender to ...
  5. Temporary Lender

    A mortgage lender that sells the loans it originates into the ...
  6. Loan Stock

    Common or preferred stock shares that are used as collateral ...
Related Articles
  1. 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.
  2. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  3. 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.
  4. 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.
  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 Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  7. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  8. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  9. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Find out about the difference between closed-end credit and lines of credit, and how both closed- and open-end credit is ... 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. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
Trading Center