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 As payments are made toward the balance, the balance owed decreases, but it is unlikely those funds can be withdrawn a second time.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.

RELATED TERMS
  1. Closed-End Credit

    A loan or extension of credit in which the proceeds are dispersed ...
  2. Line Of Credit - LOC

    An arrangement between a financial institution, usually a bank, ...
  3. Credit Limit

    The amount of credit that a financial institution extends to ...
  4. Loan Commitment

    A loan amount that may be drawn down, or is due to be contractually ...
  5. Bank Credit

    The amount of credit available to a company or individual from ...
  6. Utilization Fee

    An annual fee assessed by a lender against a borrower. The fee ...
Related Articles
  1. 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. ...
  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. Investing

    Revolving Credit vs. Line of Credit

    Revolving credit and a line of credit are arrangements made between a lending institution and a business or individual.
  4. Personal Finance

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
  5. Managing Wealth

    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

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  7. 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.
  8. Investing

    Using Home Equity Loans for Debt Consolidation

    A home equity loan or line of credit is a convenient way to consolidate debts, cut your interest rate and gain a tax deduction. But there are big risks.
  9. 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.
  10. Taxes

    Debt Consolidation: When It Helps, When It Doesn't

    Here's the smart way to use a debt consolidation to get your financial life back on track
RELATED FAQS
  1. What are the typical requirements to qualify for closed end credit?

    Learn what closed-end credit is, and the various requirements that borrowers must meet in order to obtain a closed-end credit ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What are the differences between revolving credit and installment credit?

    Discover how to distinguish between installment credit loans and revolving credit loans, and learn how they affect your credit ... Read Answer >>
  5. What are some good alternatives to taking out a line of credit?

    Read more about how opening a line of credit might not be the best answer for you and determine available alternatives if ... Read Answer >>
  6. What are the differences between revolving credit and a line of credit?

    Understand how to differentiate between a line of credit and a revolving credit account, and find out why business owners ... Read Answer >>
Trading Center