Closed-end credit is also known as installment loan or secured loan. It is a type of loan that requires borrowers pay regular interest and finance charges for a certain period of time and pay back the entirety of principal by maturity date. Closed-end credit has two types: secured closed-end credit and unsecured closed-end credit. Secured closed-end credit is backed by borrowers’ property thus it may be approved in a short period of time and have longer loan term.
Closed-end credit helps borrowers buy expensive items, such as a house or a vehicle. It may sound similar to credit cards yet the two of them belong to different categories. The former one, closed-end credit, is restricted to certain items and the loan will close after a period of time. By that time, borrowers have to pay back the interest and the full principal. Closed-end credit does not offer available credit and the terms is set at the beginning. However, the latter one, open-end credit, can be applied to all kinds of use and it has no maturity date. As long as participants only borrow the money within the amount of the set maximum and make monthly payments, they can enjoy the benefits of open-end credit.
How does it work?
To get a closed-end credit, borrowers have to inform the lender about the use of their money at first and sometimes they may need to make a down payment. If their closed-end credit is approved, the lenders will set several rules, including loan amount, monthly payment, loan term, and interest rate, which are based on their credit rating. Once the borrowers have got the closed-end credit, they can use it to purchases expensive items. During this process, they should follow the rules established by the lenders and make interest payment in time and pay back the whole principal by the maturity date. For the loans like auto loan or mortgage loan, the lender will transfer the ownership to borrowers when they complete the loan payment. If the borrowers do not make payment in time, the lenders will claim borrowers’ belongings as compensation. Note that some lenders could also charge borrowers penalty if they pay back the loan before the maturity date