Key Takeaways:
- Closed-end credit provides money in one lump sum at closing
- Borrowers must repay the funds in regular monthly installments
- Secured loans often charge lower interest rates than unsecured loans
- Lenders may charge interest and additional fees for the loan
When you need quick cash, you have several options, including closed-end credit. Many lending institutions also call these loans secured loans or installment loans. This type of loan provides funds in one lump sum. You repay the loan monthly with a fixed payment amount. Once repaid, the loan is closed.
Your monthly payment includes principal and interest. The interest is a fee the lender charges to borrow the funds. Many lenders allow early loan repayment, if you can, without paying a penalty. Ask upfront before borrowing the funds if you plan to try to pay your loan off before its final due date.
Definition of Closed-End Credit
Closed-end credit means you receive the funds when you close the loan. You have a specific due date for repaying the funds and required monthly payments. Financial institutions like banks, credit unions, and online lenders have closed-end credit loans.
How Does Closed-End Credit Work?
Closed-end credit is a legal agreement between you and the lending institution, such as the bank. To get the necessary funds, you must complete a loan application and provide the lender with documentation proving you qualify for the short-term loan. You have a set period to repay the loan and minimum monthly installments you must pay.
Lenders use your credit score, pay stubs, and W-2s to determine what you can afford. Some closed-end credit is secured. This means you put up collateral in exchange for the funds; some are unsecured and don’t require collateral.
Good to Know – What’s the Difference Between Closed and Open-End Credit?
Closed-end credit pays the funds in one lump sum immediately after closing the loan. Open-end credit is revolving credit or a line of credit. You use the funds as needed and can pay interest only if desired. You can also repay the amount borrowed and reuse the funds during the ‘draw’ period. After the draw period, it becomes similar to a closed-end loan with principal and interest payments required to repay the loan amount.
Types of Closed-End Credit
Closed-end credit is available in several different loan types, including the following:
- Mortgage loan: A mortgage loan uses your house as collateral. You borrow funds to purchase a home. Most borrowers need a down payment, and if you don’t repay the loan as agreed, the lender can foreclose on the property.
- Auto loan: You can use an auto loan to buy a car. Like a mortgage loan, you may need a down payment or trade-in to cover some of the cost. The lender can repossess your car if you miss too many car loan payments.
- Personal loan: Personal loans don’t have a specific purpose and can be secured or unsecured. You can use the funds however needed, such as to pay a large expense, consolidate debt, or improve your home.
- Title loan: If you have an emergency and don’t have the funds to cover it, a title loan may help. You use your car’s title as collateral and must own your car lien-free. They have high annual percentage rates and fees and should only be for emergencies.
What are the Advantages of Closed-End Credit?
Closed-end credit has several advantages, including:
- Variety of uses: You can borrow closed-end credit for major purchases, such as a house or car, or to have funds for personal expenses.
- Builds credit history: Lenders report closed-end credit loans to credit reporting agencies. If you make your payments on time, your score may increase.
- Fixed interest rates: Many lenders offer fixed interest rates on closed-end loans. This makes it easier to budget for the payments.
What are the Disadvantages of Closed-End Credit?
All loans have disadvantages. Understanding the downsides of closed-end credit can help you determine if it’s the right choice:
- Limited access to funds: You only have access to funds when they disburse. You don’t get to reuse the funds as you repay the amount borrowed.
- Required monthly payments: As determined by the lender, you must pay principal and interest every month. There isn’t an option to pay interest only.
- May include fees: Some lenders charge origination fees or prepayment penalties, making the loan more expensive than you anticipated.
Secured vs. Unsecured Closed-End Credit
| Secured Closed-End Credit | Unsecured Closed-End Credit | |
| Collateral Required | Yes, usually a car, house, or other major asset | No collateral is required |
| APR | May be lower because you put up collateral | May be higher because they rely on your creditworthiness |
| Qualifying Requirements | May be more flexible because of the collateral lenders can take | May be stricter because lenders don’t have collateral to use |
| Loan Term | May be short or long term | Usually 2 – 7 years |
FAQ
Which is Better Closed-End or Open-End Loans?
The right loan for you is the one you can use responsibly. Open-end loans have more flexible terms but can put you in a bad situation. If you use the loans excessively and cannot repay the debt, you may lose your collateral and ruin your credit. Closed-end loans have fixed monthly payments, and you receive funds once, so they may be easier for some people to manage.
Can You Use Your Car as Collateral on a Loan?
Yes, many lenders let you use your car as collateral on a secured loan, such as an auto loan, secured personal loan, or car title loan. Remember that you could lose your car if you don’t make your payments.
How Does Closed-End Credit Affect Your Credit Score?
Closed-end credit can help or hurt your credit score. Making your payments on time may help since your payment history is a large part of your credit score. But, if you miss payments, it can seriously damage your score.
On the other hand, it can help improve your credit mix. Ten percent of your credit score focuses on the variety of credit types you carry. Closed-end credit is an installment loan. If you only have credit cards (revolving debt), the variety may help your score.
Final Thoughts
Unlike open-end credit, closed-end credit usually has a purpose and deadline for repayment. It can be good when you need funds for a specific purpose or to improve your credit score. They are available in many forms, including personal, mortgage, and auto loans.
Remember, if you borrow a secured loan, you risk losing your collateral if you don’t pay. In addition, be mindful of the loan’s interest, fees, and monthly payment, and only borrow what you can afford.
If you experience a financial emergency and need funds fast, contact us to discuss your options for car title loans to satisfy your financial need quickly.
Written by
Samantha Hawrylack
Samantha Hawrylack writes for our company and is an expert in personal finance. Sam received her Bachelors of Science in Finance and her Masters in Business Administration from West Chester University of Pennsylvania. She began her career in the financial services industry and shifted to an entrepreneurial role where she could directly impact clients. Sam has an impressive background in personal finance and business management.