What is 'Open-End Credit'
Open-end credit is a preapproved loan between a financial institution and borrower that may be used repeatedly up to a certain limit and can subsequently be paid back prior to payments coming due. The preapproved amount will be set out in the agreement between the lender and the borrower. Open-end credit is also referred to as a "line of credit" or "revolving line of credit."
BREAKING DOWN 'Open-End Credit'Open-end credit agreements are advantageous to borrowers, as they exert more control over how much they borrow and when. In addition, interest is not usually charged on the part of the line of credit that is not used, which can lead to interest savings for the borrower compared to an installment loan.
Open-end credit often takes one of two forms: a loan or a credit card. Within the consumer market, credit cards are the more common form as they provide flexible access to funds and are immediately available again once a payment is received. A home equity line of credit is one of the more common loan forms in the consumer market, allowing borrowers to access funds based on the level of equity in their homes or other property.
On the business side, a line of credit loan may use different metrics to determine the maximums. These can include information regarding a company’s value or revenue, or it may also be backed by a form of collateral, such as real estate assets and the value of other tangible goods held by the organization.
Line of Credit Loans vs. Closed-End Loans
In both the consumer and business sectors, the main difference between a line of credit and a closed-end loan involves how the funds are initially distributed and if they can be reused as payments take place. While both will have a maximum dollar amount allowed, known as the credit limit, the loans function in different manners.
In a closed-end, also referred to as an installment, loan, the total amount of the loan is provided to the borrower upfront. As payments are made toward the balance, the balance owed decreases, but it is unlikely those funds can be withdrawn a second time. This is what prevents a closed-end loan from being considered a revolving form of credit.
With a line of credit, the full amount of the loan is available once it is granted. This allows borrowers to access as much or as little as they want depending on their current needs. As the balance owed is paid down, borrowers can also choose to withdraw the funds again, making the line of credit revolving in nature.