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.
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.