With so many different types of loans available, you might be confused about what each one entails and the benefits of each.
Simply put, open-ended loans are a type of revolving credit that you can borrow from and pay back regularly. Your open-ended loan will have a credit limit for that borrowing and repayment.
Whether you have never heard about open-ended loans or if you have, but don’t know the ins and outs of this type of loan, this article can help bring you up to speed regarding everything you need to know. Continue reading to find out more.
How Do Open-Ended Loans Work?
Open-ended loans are used frequently by most people in our society, whether it’s as a credit card or a line of credit through your financial institution.
With an open-ended loan, you’ll be given a predetermined limit for borrowing and you can borrow and pay back as needed, making it a revolving loan.
Your credit limit will be determined upfront and usually, after a check of your credit score. Once your limit has been set you can access that credit as needed, paying off the amount and reusing that credit. The line of credit will remain open for you to use as long as you continue to make payments.
You’ll need to make regular payments on the balance and keep balances low on your credit cards or your line of credit to help strengthen your credit score in a positive way.
Common Types Of Open-Ended Loans
Now that you know what an open-ended loan is and how it works, this is probably all sounding pretty familiar. You might have one or more open-ended loans without knowing this more technical term.
There are two types of open-ended loans that you might have access to or already have. These include a loan from your financial institution or a credit card account, with credit cards being the far more popular option.
When it comes to an open-ended loan from your bank or credit union, you may have heard of a home equity line of credit. These are very popular forms of open-ended loans in which you, as a homeowner, are allowed to borrow funds based on the amount of equity in your home or another property you own.
Revolving loans like those discussed above aren’t just available to individuals, but also to business owners. Their limits can be determined by a company’s value or its revenue or collateral. Collateral can include real estate or other goods that the company owns.
Benefits Of Open-Ended Loans
Open-ended credit can be beneficial for the borrower. You have freedom when it comes to when you want to borrow and how much. You don’t have to borrow the entire credit limit and interest isn’t charged on the portion you have left.
If you have a $10,000 best installment loans Illinois line of credit and only need to borrow $2,500, you can do that and only pay interest on the amount you borrowed. Your access to that $10,000 is flexible and once you have paid back the $2,500 it is available again.
This type of loan is extremely beneficial if you have unexpected emergencies that come up, as they often do in day to day living. Regardless of whether your refrigerator dies or you have unexpected medical bills or your car needs repair, with an open-ended loan, you can use the money to help in those situations.
Open-Ended Vs. Closed-Ended Loans
Where there are open-ended loans, there are also closed-ended loans. There’s a very easy way to distinguish between the two loans and this involves how the loan amount is distributed initially and then if you can use the funds again as payments are made.
Unlike with open-ended loans that revolving and readily available when needed, closed-ended loans involve funds that are distributed upfront with the borrower making payments towards that amount. With closed-ended loans, once those payments are made, the funds aren’t able to be withdrawn again. Some examples of this are home or auto loans.
Open-ended loans are commonly used in our everyday life and odds are that you have used or are currently using either a credit card or a line of credit from a financial institution. Having a line of credit or a credit card will give you some security and flexibility when it comes to using that balance. As long as you are repaying your open-ended loan and remain in good standing, you’ll be able to maintain this for your use as needed. Understanding what open-open-ended loans are and how they work will allow you to use them to your benefit.