Closed-end credit refers to a type of loan or credit in which the amount borrowed is set in advance and the loan is repaid over a fixed period of time in installments, typically through monthly payments. This type of credit is also known as installment credit.
One of the key features of closed-end credit is that the borrower is obligated to repay the loan in full, including all interest and fees, by the end of the loan term. The loan term can range from a few months to several years, and the interest rate on the loan is typically fixed.
Closed-end credit is used to finance a wide range of purchases, including homes, vehicles, and consumer goods like furniture or appliances. It is also used to pay for medical procedures or to consolidate debt.
In contrast to open-end credit, such as credit cards, which allows the borrower to access a revolving line of credit, closed-end credit has a set limit, or maximum amount that can be borrowed.
This limit is determined by the lender and is based on the borrower’s credit history and income. Once the loan is fully repaid, the borrower cannot access the funds again, unless they take out a new loan.
Another key difference between closed-end credit and open-end credit is the way in which interest is calculated. With closed-end credit, the interest rate is typically fixed and the loan is structured so that the interest and principal are repaid in equal payments over the term of the loan.
With open-end credit, the interest rate is often variable and can change over time, and the borrower is only required to pay a minimum payment each month, which may only cover the interest due.
Closed-end credit is generally considered less risky for the lender, as the loan is secured by collateral, such as a home or vehicle, which can be repossessed if the borrower defaults on the loan.
This collateral also typically means that the interest rate on closed-end credit is lower than that of open-end credit.