Definition – What is Closed-End Credit?
A closed-end credit is defined as credit that must be repaid in full by the end of a fixed term.
Repayment includes the original amount of the loan, plus all associated finance charges.
Closed-end credit can be found in various forms throughout the financial world.
What are some common examples of Closed-End Credit?
Most real-estate and auto-loans are forms of closed-end credit that require regular monthly payments. For example, a 15 year, $200,000 mortgage with a 3.4% interest rate. After fifteen years of monthly payments, the loan and interest are paid in full.
Mortgage Loan is an Example of a Closed-End Credit
Auto loans typically work the same way, but the term of the loan is much shorter—for example, a sixty month, $20,000 auto loan with a 3% interest rate.
Both of these loans are common examples of closed-end credit.
There are also instances of closed-end credit in which no monthly payments are required. In this case, the entire loan (principal plus interest) must be paid when the loan matures.
What are the advantages of Closed-End Credit?
The successful management of closed-end credit obligations is highly-favorable in the eyes of potential creditors.
If a creditor sees that a potential debtor has managed closed-end credit in the past, and has paid (or is paying) the required installments in a timely manner, the creditor is more likely to offer favorable terms.
Closed-end credit also has the advantage of fixed interest rates. This allows the debtor to clearly plan for all the necessary payments, and easily discern what the total cost of the loan will be.
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