A closed-end loan is a common type of consumer loan where the repayment amount, length and terms are clearly spelled out in the upfront agreement. This loan contrasts open-ended loans, such as credit cards and lines of credit, where the interest rate, credit limit, terms and repayment amount can fluctuate over time.
Closed-End Loan Purpose
A closed-end loan allows both the lender and borrower to know the exact terms of the loan agreement from the start. These loans are common for major purchases, such as homes, cars and boats. Some also get a closed-end personal loan for debt consolidation. The closed-end loan has preplanned installments, so the monthly payment is constant throughout the repayment period.
Pros and Cons
The ability to budget a predictable payment is a major closed-end loan benefit. Interest rates are often lower and more constant as well. Revolving credit card interest rates are notoriously high. A primary drawback of closed-end loans relative to open loans is that they don't offer the same borrowing flexibility for changing needs.
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