Personal Finance

Understanding closed-end credit

Closed-end credit is a type of consumer loans provided for customers to purchase goods or services. Consumer loans can be broadly classified into two types – open-end credit and closed-end credit. Closed-end credit loans are those loans which are provided for a fixed amount of money, for a definite period of time and for a specific purpose. That is, a closed-end credit transaction features a one time, lump sum of money paid for a specific purpose.

Generally closed-end credit loans are provided for a maximum period of five years or less. It is also necessary for the borrower to state the reason for applying a loan. Automobile loans and real estate loans are some of the examples of closed-end credit loans.

Closed-end credit loans are also known as installment loans as these loans have to be paid back in equal monthly installments. The goods that a customer purchased are used as collateral for the closed-end credit loan. That is, if the borrower doesn’t make repayments on a car loan, the lender or the bank will recoup the loan amount by taking the possession of the vehicle the borrower bought.

In most cases, closed-end credit applies a fixed finance charge and the customer has to make regular repayments and complete the loan in an agreed amount of time. Usually the closed-end credit transaction may take the form of a retail installment contract or simply a sales slip and an agreement to take back the purchase price in installment payments.

A typical example for a closed-end consumer credit sale includes the financed home modernization purchase. In this case the lender offers a home improvement loan to a borrower to purchase any home appliances through installment payments. Many people use these types of loans to purchase home appliances such as refrigerators, furniture, washing machine, and television.

There are lots of banks and financial institutions offering closed-end credit facilities. Even though the plans will the same, there will be difference in the interest rates. Hence it is better from a borrower’s part to compare the interest rate of several banks before applying for a closed-end credit loan. In most cases you will surely get closed-end credit at a much lesser rate than the one you selected first.

Nowadays with the advent of internet you can search and find out the schemes and details of closed-end credit offered by various financial institutions and banks from your home and office. The internet also offers the facilities to compare the interest rates of various closed-end credit providers. Also, there are some financial institutions which provide online loan facilities. This helps you to apply a closed-end credit from your home. Most of them also offer instant approval after checking your documentary evidence.

Closed-end credit is considered as an ideal option for those who wish to purchase a car or for those who want to make some improvement in their home. Whatever your purpose may be a closed-end credit is a suitable option. Try to make repayments in appropriate time and built a good credit history so that when you apply for a new loan next time you will get it much easier.