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Closed-End vs. Open-End Credit: Definitions, Differences & How to Choose

  • by Harita Solanki|
  • 0 Comment |
  • Updated: March 11, 2022 |
  • Credit

Closed-End Credit vs. Open-End Credit: What's the Difference?

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 You have the option to pay back the previous amount withdrawn in full or make installment payments to restore your credit limit.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.

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