When you don't have enough money to pay for things you need,
you might want to either get a loan or use a credit card.
While an installment loan is a type of closed-end credit,
credit cards are the most common form of open-end credit. To
decide whether a loan or a credit card would be best suited
for your financial situation, knowing about closed-end and
open-end credit can help you make a better, more conscious
decision.
So, let's discuss the meaning of both open-end and
closed-end credit and their differences to help you choose
the right
type of credit.
What is an Open-End Credit?
An open-end credit, also known as
revolving credit, is a type of credit that allows you to make repeated
withdrawals when needed up to a certain limit. You have the
option to pay back the previous amount withdrawn in full or
make installment payments to restore your credit limit. The
best part of open-end credit is that you pay
interest
on only the amount you use, helping you save money on the
interest of the unused amount.
Unlike closed-end credit, an open-end credit can be used for
your frequent and unexpected financial needs and not
necessarily for a specific purpose. Credit cards are the
best examples of open-end credit, mostly unsecured. On the
other hand, a home equity line of credit (HELOC) is a
secured type of open-end credit.
What is Closed-End Credit?
Closed-end credit is a lending option that allows you to
borrow funds upfront and repay the entire amount with
interest by the end of the borrowing term. The funds you
apply for are disbursed all at once. It means you won't be
able to increase the
principal
amount or borrow any further at any point during the loan
term after the disbursement of funds.
Most often, the term closed-end credit is used synonymously
as
installment loans. The most common examples of closed-end credit are
mortgages and auto loans, where the purpose of taking out a
loan is known and definite. Although these loans usually
have a specific purpose, a
personal loan
that you can borrow for any purpose also falls under the
closed-end credit category.
How Do Closed-End and Open-End Credit Differ?
Every loan form has its characteristics and works
differently. Closed-end and open-end credit are also
significantly different from each other depending on various
factors, which we've clearly shown in the table below:
|
Differentiating Factors
|
Closed-End Credit
|
Open-End Credit
|
|
Ideal Use
|
Ideal for making a big-ticket purchase.
|
Ideal for short-term purchases and expenses.
|
|
Loan Disbursement
|
The entire amount of the loan is provided to
the borrower upfront.
|
The borrower is allowed to make repeated
withdrawals up to a certain limit.
|
|
Interest Rates
|
Closed-end credit usually has a lower interest
rate than open-end credit. However, interest
is charged on the entire principal amount.
|
Though you pay interest on only the amount you
use, the interest rates tend to be higher as
there is usually no collateral.
|
|
Repayments
|
Generally, borrowers are given an option to
make fixed and scheduled payments that
comprise a portion of both the principal and
interest until the loan is paid in full.
|
Borrowers can pay the outstanding balance in
full each month or make installment payments
to maintain the pre-approved borrowing limit.
|
How to Choose the Right Type of Credit
There are two main factors that you should consider while
choosing a particular type of credit, the need to borrow
money and your ability to repay. When we talk about
closed-end and open-end credit, both have different ways of
making money available to you and repayments plans. While
both types of credit can positively impact your credit
score, failing to use them responsibly can damage your
scores.
We purposely didn't mention the pros and cons of closed-end
and open-end credit as both the credit types are essential
and work great under different financial situations. Since
you can repeatedly borrow with the help of open-end credit
like a credit card or
personal line of credit
loan, you can use it when there are multiple unexpected
bills to be paid over some time. You can also deal with
short-term financial emergencies with a credit card if you
have just started to build your emergency fund.
For single and large purchases, you can rely on closed-end
credit options. The amount you need to help finance a house
or a car is enormous and choosing an installment loan
instead of a credit card is much better. Once you decide on
your credit type, make sure you read the terms and
conditions carefully to avoid any unpleasant surprises.
Closed-End and Open-End Credit Options at CASH 1
Fortunately, we have something for everyone! If you find
yourself in need of extra money now and then, we offer a
personal line of credit in
Utah,
Idaho,
Kansas, and
Missouri. A personal line of credit is a kind of open-end credit
that allows you to make multiple withdrawals and repayments
within the pre-approved borrowing limit.
If you're looking for a closed-end credit option, you can
apply for our installment loans in
Arizona
and
Nevada. Whether you choose our open-end credit option or
closed-end one, you will be able to get the benefit of fixed
monthly repayments in both cases.