Credit is often used to draw money you have borrowed or a lot of money you are able to borrow from the bank or a credit card company. You are able to use the loan for a variety of purposes as long as you stick to the payment terms. There are two basic types of credit: open-end credit and closed-end credit. It is important to know what type of credit you have and it is available to you.


Closed-end credit vs. Open end credit

Closed credit vs. Open end credit

With open-end credit, you can keep using the same loan over and over as long as you make the minimum monthly payments on time each month.

Closed-end credit is a type of credit that you can only use once. After you repay your balance, you cannot use the loan or loan again. You will apply for new loans when you need to borrow again. Most loans are a type of closed-end loan. You do not have to pay back the full amount of the loan plus interest and fees within a certain time. The period for the repayment of closed-end loan is usually given in months.


How to get approved for the closed end loan

How to get approved for the closed end loan

You can apply for closed end credit from a bank or credit union. You may be able to use what you borrowed for a specific purpose. Or, the lender may require that you use the loan for a specific type of purpose. For example, a car loan is a type of closed-end loan that must be used to buy a car. A personal loan in comparison is closed-end credit that you can use as you want.

To get closed-end credit approved, the lender will review your credit history. You may need a good credit score to be approved. In some cases you can make a down payment. Your credit score will affect the amount you can borrow and the interest rate you pay.


Terms of payment on closed-end credit

Terms of payment on closed-end credit

Every time you borrow money, you have to pay interest. With a closed end loan, the interest rate is usually fixed all the time your loan is outstanding. Occasionally, you can also use a floating rate with a closed end credit. Closed-end loans usually have a lower interest rate then open-end loans, which makes it better for longer-term loans. You will pay less total interest by using a low interest rate.

You will be required to make a payment every month until the balance is paid. Part of your payment will go towards balance and the rest towards interest. If you are late for a payment you will be charged a late fee. The credit bureaus can receive notification of your late payment if it is more than 30 days late. You will be considered in standard if your account becomes 90 to 180 days past due (depending on the conditions). At this point, the lender gets the full balance and you won’t be able to make monthly payments. This is also the case with open end credit.

With open end credit, you are only required to make a small minimum payment based on the outstanding invoice amount each month. At the closed end credit, you have a fixed monthly payment that allows you to pay your balance within a fixed monthly payment. The monthly closed-end loan payments are usually higher than open-end loan of the same amount. Because you have to keep a fixed schedule of payments, you won’t have the flexibility to make lower monthly payments if you need to.


How Closed-End Credit Affects Your Credit

How Closed-End Credit Affects Your Credit

Closed-end credit affects your credit card the same as other credit accounts. When creditors report your account to the credit bureaus and your timely payments help to increase your credit score. Delayed payments, on the other hand, can cause your credit score to drop. While the account is in the process of repayment, creditors will send monthly updates to your account status’s credit bureaus. Once you have made the payment, the account will be closed and it will remain on your credit report for another 10 years or so. Any negative information associated with your account will fall out of your credit report after 7 years.


Secured against unsecured closed-end credit accounts

unsecured credit accounts

Closed-end loan secured or unsecured. Secured closed-end credit requires that you put collateral that the lender can take possession of if you default on the loan terms. This may be required for larger loan amounts or if your loan does not allow you to qualify for unsecured closed-end credit. Unsecured closed-end credit, on the other hand, only requires to meet the credit requirements and agree that you will repay the loan on time. Securing closed-end credit can improve your ability to get approved, increase the amount you can borrow, and lower your interest rate. Of course, it is important not to default.

The easiest way to tell whether you want to apply for closed-end credit, whether you can keep using the credit over and over again, or whether you only borrow once. Once you borrow the money back then apply for closed-end credit. It certainly has its advantages. As with any borrowing situation, make sure that you can conveniently make the monthly payments before taking on a new debt obligation.

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