A:

Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. A line of credit is a type of open-end credit.The difference between these two types of credit is mainly in the terms of the debt and the debt repayment.

Closed-End Credit

Closed-end credit includes debt instruments that are acquired for a particular purpose and for a set amount of time. At the end of a set period, the entirety of the loan must be repaid, including any interest payments or maintenance fees.

Common types of closed-end credit instruments are mortgages and car loans. Both are loans taken out for a specific period, during which the consumer is required to make regular payments. In loans like this, when an asset is being financed , the issuing institution usually retains some ownership rights over it, the as a means of guaranteeing repayment. For example, if a customer fails to repay an auto loan, the bank may seize the vehicle as compensation for the default.

Open-End Credit

Open-end credit is not restricted to a specific use or duration. Credit card accounts, home equity lines of credit (HELOCs) and debit cards are all common examples of open-end credit (though some, like the HELOC, have finite payback periods). The issuing bank allows the consumer to utilize borrowed funds in exchange for the promise to repay any debt in a timely manner.

Unlike closed-end credit, there is no set date when the consumer must repay all of his borrowed sum. Instead, these debt instruments have a maximum amount that can be borrowed – though this is often revisable – and require monthly payments based on the amount of credit used. These payments include interest, of course.

Line of Credit

Under a line of credit agreement, the consumer takes out a loan that allows him to pay for expenses using special checks or, increasingly, a plastic card. The issuing bank agrees to pay on any checks written on or charges against the account, up to a certain sum.

This type of credit is often used by businesses, which can use company assets or other collateral to back the loan. Such secured lines of credit often have lower interest rates than unsecured credit, such as credit cards, which have no such backing.

For more, see What are some good alternatives to taking out a line of credit?

RELATED FAQS
  1. In what instances does a business use closed end credit?

    Find out how businesses use closed-end credit to finance large purchases such as vehicles, equipment and property, including ... Read Answer >>
  2. 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 >>
  3. What's the difference between a secured line of credit and an unsecured line of credit?

    Discover the differences between a secured line of credit and an unsecured line of credit, and why lenders treat the two ... Read Answer >>
Related Articles
  1. Personal Finance

    The Basics of Lines of Credit

    Learn how a line of credit, hybrids of credit cards and normal loans, can help (and hurt) your finances, and how to find the best one to suit your needs.
  2. Small Business

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  3. Personal Finance

    6 Ways To Build Credit Without A Credit Card

    It's definitely possible – if a bit more complicated – to build a credit history without traditional credit cards. Just follow these steps.
  4. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  5. Personal Finance

    Is Your Credit Score at 850? It Can Be!

    Use these tips to increase your credit score and your ability to get low interest rates on loans.
  6. Investing

    Investing In Credit Card Companies

    This investment requires keeping an eye on consumer indexes and the overall health of the economy.
  7. Personal Finance

    Take the Right Steps to Build Excellent Credit

    There are several things you can do to protect and improve your credit score.
  8. Personal Finance

    Should You Use Credit Cards To Fund Your Business?

    We give you 4 reasons to consider using a credit card instead of a business loan to fund your business, and how to be smart about it.
  9. Personal Finance

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  10. Small Business

    How to Use Small Business Credit Cards

    A business credit card can be a convenient way to increase your company's purchasing power, but must be carefully managed.
RELATED TERMS
  1. Consumer Credit

    A debt that someone incurs for the purpose of purchasing a good ...
  2. Credit Limit

    The amount of credit that a financial institution extends to ...
  3. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  4. Good Credit

    A qualification of an individual's credit history that indicates ...
  5. Bad Credit

    A qualification of an individual's credit history that indicates ...
  6. Credit Card Balance

    The amount of charges, or lack thereof, owed to the credit card ...
Trading Center