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The Difference Between Open-end and Closed-ended Loans

Published on January 13, 2013, by in Funding.

open end loan

Open ended loans are instruments that allow an individual to put money in and take money out, such as a cash withdrawal or making a charge. Open loans have credit limits that cannot be exceeded without a penalty.  They loans tend to be more flexible and provide other options for the consumer. On a line of credit that is open ended one will pay interest only if there is a balance outstanding when the statement period ends. The advantage of an open ended line of credit is that the limit can be increased if the borrower is fiscally responsible.

Open-ended loans, are loans that you can borrow over and over. Lines of credit and credit cards are the most common types of open-ended loans. Every time a purchase is made, an individual’s credit available goes lower. Each time you make a purchase, your available credit decreases. But when a individuals makes their payments, they are able to reuse the same credit. An example of a loan that is open-ended includes credit cards such as Discover, MasterCard and American Express. A certain limit is agreed upon and generally allows an individual to purchase items to a specified amount. Another example of an open ended loan is credit lines such as Overdraft provisions and home equity line of credit.

Closed-ended loans are different in that they do not extend any further credit until the borrowed amount has been repaid. An individual has to continue to make payments on these until both the interest and principal are repaid. As a result there is no available credit one can use on closed-ended loans. Closed ended loans generally set the terms of the loan right from the beginning. When a loan is closed-end loan the entire value of the loan is distributed to the borrower, and is then repaid over a specified time period in equal installments.

Closed-ended loans are nicely devised and presented by the borrower with a specified term, balance and interest rate. Most of the time these loans are created to accommodate larger purchases. An individual is usually able to make payments throughout the loan, but is not able to extract money. The loan amount is determined by the lender, and the borrower then consents to make payments to pay off the interest and principal.

Installment loans generally allow an individual to make extra principal payments before maturity, with the drawback that an individual cannot access the equity in the purchased property. Typically, during the early years of the loan it is primarily interest and principal is paid towards the end of the loan period. Examples of closed-ended loans include student loans, auto loans and mortgage loans.

Even though a closed-ended loan definitive in nature, they can be altered to accommodate the borrowers financial needs. Closed end lending requires the borrower to apply each time, whereas with an open-ended loan, as long as the borrower is on file that is sufficient for more funds. Both types of loans can be the perfect fit for different situations. Some borrowers may desire a more structured loan while others are comfortable with a flexible agreement. Depending on the borrower’s financial situation, either loan can be a good fit depending on the individuals needs.

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Home Funding The Difference Between Open-end and Closed-ended Loans