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What is Closed-End Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 October 2014
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Closed-end credit is a form of credit that requires payment in full to be rendered at a specific point in time in the future. In most cases, the extension of this type of credit involves the accrual of finance charges and interest that are also considered due at the same time that the full principal is settled. Because closed-end credit has a definite end date for the conclusion of the extension of the amount of credit issued, it is a different approach to the revolving line of credit that is the common method with credit cards.

Two of the most common examples of closed-end credit are loans for homes and automobiles. Mortgages are essentially a strategy for providing an extension of credit to purchase the home. The structure of the credit will involve the application of a rate of interest. Interest rates for mortgages may be fixed or varied.

Once the final total for the credit is determined and approved, the projected total amount of the mortgage is broken down into monthly installment payments. A portion of each monthly installment is devoted to paying back the interest as well as the principal. Some lenders break down the amount of each payment that is going to over the principal and the interest. Once the closed-end credit arrangement is settled in full by the borrower, the lender relinquishes all claims on the home and property.

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Auto loans are another common application of closed-end credit. Like a home loan, the auto loan is an extension of credit that is to be repaid in full by a specified future date. However, the terms and the conditions of the closed-end credit may be slightly different. The period allowed for repayment is usually much shorter, and the interest rate applied is much more likely to be fixed rather than variable.

Closed-end credit represents an excellent opportunity to build a strong credit rating, especially with the use of auto loans. Repaid credit demonstrates the commitment of the individual to honor financial commitments, and can serve as an important indicator that will help determine eligibility for credit opportunities with more attractive terms in the future.

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Sunny27
Post 3

Cafe41-That is so true and you do not want the credit scoring system to adversely affect your credit.

This will make it more difficult for you to finance anything like an apartment or another home or car.

cafe41
Post 2

Suntan12-Sometimes people look to refinance home equity in order to pay off credit cards because these credit items have high balances and high interest rates.

This is a mistake. The reason why is very simple. A home equity line is a revolving credit line that works like a credit card. You start making payments immediate upon drawing from it. It is enticing to take advantage of the low rates in order to eliminate your credit card balances because the average credit card charges 18% interest while the average home equity line is 4% to 8%.

The problem is that a home equity line of credit places a lien on your home, so if you default, you could lose your home. In addition, because banks classify this as a recourse loan, the banks can go after you legally to pay the remainder of your loan.

It is important to be very careful with these types of products. Another problem occurs if the housing market continues to slump, then you may not be able to sell your home.

suntan12
Post 1

A home refinance loan allows you the opportunity to take advantage of the low interest rates. Many of the current interest rates for mortgages are at an all time low.

If you want the best credit interest rates it is best to look on Bankrate. Bankrate offers the best rates available not only on loan products but on credit cards and deposit products as well. It is a great informative site that offers everything you need to know about the current rates.

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