What Is Closed-End Credit?

Closed-end credit is one of your options. Whether you want to consolidate higher-interest debt, make a large purchase, or borrow money for another reason, a closed-end loan may be a good choice to help you finance your plan and build a strong credit history. This type of loan could allow you to make a big purchase now and pay for it over time with predictability.

Keep reading to learn what closed-end credit is and when it might be the right tool to help you reach your financial goals.

What does closed-end credit mean?

Closed-end credit allows you to borrow a set amount of money and pay it back in a fixed amount of time. Also known as an installment loan, it is called “closed-end” because it has a firm end date by which the loan must be fully repaid. The total payment for the loan includes any interest, finance charges, or other fees that might be charged. 

Closed-end credit is often used to pay for major expenses or to pay off other debt. It may be used to consolidate revolving loans, such as credit cards that allow you to continue borrowing money without a set end date for full repayment. With a closed-end loan borrowers may combine multiple revolving debts into a single loan with one set regular monthly payment and a fixed end date.

How does closed-end credit work?

Closed-end credit works by allowing you to borrow money through either a secured or unsecured loan. Secured loans are backed by collateral, such as a house or car, which could be taken by the lender if you are unable to pay back the loan. Unsecured loans do not involve collateral.

Once you are approved for a closed-end loan, you typically receive the funds in one lump sum. You then repay the loan, typically with interest, in monthly installments over the loan’s repayment term.

The planned final payment will bring your loan balance to zero. You can pay off your loan early, but be cautious, as some loans may charge prepayment penalties. When the loan is paid in full, your lender will close the account.

What are examples of closed-end credit?

Some common closed-end credit examples are:

Auto loans

Auto loans are used to buy new or used cars, as well as motorcycles, boats, and other vehicles. These are secured installment loans that are repaid over a fixed period of time, usually from 24 to 84 months.¹ The average term of an auto loan in the fourth quarter of 2023 was slightly more than 5½ years.²

Mortgages 

A mortgage is a loan that is used to purchase a house. This type of loan is also secured, in this case by the value of your home. For most types of homes, the mortgage term for mortgages is typically 15, 20, or 30 years. ³

Student loans

Student loans are used to pay for post-secondary education and sometimes even K-12 education. They are typically installment loans paid back over a set period of time. Federal student loan terms range from 10 to 30 years for consolidated loans or 10 years for non-consolidated loans.⁴ Check with your lender for details.

Buy now, pay later

A "buy now, pay later" (BNPL) loan is a financing option that may be offered by retailers at checkout. After making an initial payment at the time of purchase, you are allowed to pay off the remaining balance over a number of fixed payments. While most BNPL loans don’t charge interest, they may charge late fees, and disputes and returns can be complicated.⁵

Payday loans

A payday loan is typically a short-term loan of $500 or less intended to provide funds until your next paycheck. While it usually does not require a credit check, it often comes with fees or finance charges.

What are the differences between closed-end and open-end credit?

Closed-end credit involves a loan for a set period of time. Open-end credit is not restricted to a specific use or to a fixed time for the loan to be repaid. Credit cards and home equity lines of credit (HELOCs) are common examples of open-end credit. 

Open-end credit is also known as revolving credit. Because of the way your credit report is structured, open-end credit can affect your credit utilization ratio. Your credit utilization ratio is the percentage of your available revolving credit that you are using. Your credit utilization ratio may affect your credit score.

What are the differences between secured and unsecured closed-end credit?

Closed-end credit may be either secured or unsecured. Approval and interest rates for both are based on your credit score, debt-to-income ratio, and other measures of creditworthiness. 

Secured loans

Secured loans are backed by collateral, such as a home or a car, that can be used as payment to the lender if you don't pay back the loan.

Unsecured loans

Unsecured loans do not require collateral. Personal loans and credit cards are typically unsecured.

How can you manage an installment loan responsibly?

As you decide which type of loan is right for you, consider the pros and cons of a closed-end loan. You will want to know if the payments fit your budget and how you can avoid unexpected costs like fees and penalties. This will help ensure that you are comfortable as you pay off the loan.

It is important to understand the true cost of the loan. This will help you accurately create a budget to meet your financial goals. Before applying for a closed-end loan, you will want to calculate the amount of money you need and for how long you want to pay it back. You should also check your credit score and research the interest rate and any fees. Fees charged by the lender will affect your annual percentage rate (APR). Keep in mind that the repayment terms for loans can vary. 

What are the pros of closed-end credit?

Closed-end credit may offer multiple benefits, including:

• The ability to know and plan for one set regular monthly payment
• The knowledge of when the loan will be fully repaid
• The security of having fixed interest rates, depending on the loan
• The opportunity to build up a strong credit history

What are the cons of closed-end credit?

There may be potential drawbacks as well, including:

• A one-time issuance of funds without an ability to increase your borrowing
• Possible origination fees or early repayment fees, which can add to the cost of the loan
• Penalty fees for late payments or missing payments, which may hurt your credit score

Is closed-end credit right for you? 

Depending on the reason for the loan, closed-end credit could be the best option for you. Before making a decision, it’s important to understand the different types of loans available. Then you can determine which one is the best fit for your budget and the way you manage your money.

As you weigh the pros and cons, keep in mind the impact that taking out a loan may have on your credit history, credit score, and overall budget. If you need to consolidate debt or make a major purchase, a closed-end personal loan may be right for you. Discover® Personal Loans helps you design your loan around you. Pick the amount you need and the repayment term you want to fit your budget. With Discover Personal Loans, for example, if you get approved for a $15,000 loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month. 

Want to learn more before choosing your loan? To explore your options with a closed-end personal loan from Discover and estimate your monthly payments, you can check your rate before you apply. It takes minutes and won’t affect your credit score. 

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