Open-End Loan
When we discuss loans, it is essential to know that there can be many types of loans and there also are open-end loans and closed-end loans. In regards to closed-end loans, these often work in installments for a specific amount of money. A frequently used closed-end loan is a loan for purchasing a car. The amount of the money borrowed is fixed, and the borrower pays it back in installment to the financing company.
An open-end loan is a more circular type of loan. Its circularity makes it more manageable as it doesn’t have an end date. You get the open-end loan, use the money you need, pay it back when you can, and you can reuse it when the balance shows that you have money on it. Let’s give an example of an open-end loan: you take $10,000 on an open-end loan. You use $8,000 of it, repay $5,000 of it in the next couple of months, then your balance will show $7,000—this is money you can use again, and then the wheel keeps turning. Another open-end loan definition would be to say that it’s a revolving line of credit because the credit keeps revolving with your use of it—this revolving line of credit, like a credit card or home equity line of credit.
An open-end loan allows you to use a certain amount of money, called the credit limit. The borrower does not need to use all the credit simultaneously; you take out as much as you need. Once you cover that amount, the funds still available are at your disposal for later use. There are two types of open-end loans, and we’ll take a look at what makes them different.
Open-End Unsecured
A line of credit that is unsecured makes it free from any collateral. An unsecured open-end loan is, first and foremost, based on your creditworthiness. Because it doesn’t have collateral attached to it that the financial institution can claim if the borrower does not meet the installments, the lenders take into account the creditworthiness of the borrower. The same creditworthiness can affect the credit limit. The more creditworthy the borrower, the higher the approved credit limit would be.
Open-end Secured
As this is a secure line of credit, it means that it has collateral. It can either be attached to a piece of collateral or secured by it. For this type of open-end credit, the lending company pays attention to the creditworthiness and the value of the collateral. Generally, the credit limit of a secure open-end credit is equal to the deposit the borrower has with the lending financial institution. It’s important to know that, unlike the unsecured open-end loan, failure to repay a secure open-end loan can affect your creditworthiness as well as a loss of the collateral.
Popular Real Estate Terms
Current cost to replace property with an identical property after allowing for the depreciated value of the property. ...
(1) Cash revenue from product sales or services rendered less cash expenses. It is different from accrual earnings. (2) The money available after deducting operating expenses and mortgage ...
Provision permitting a lender to charge the borrower a penalty for repaying a loan before its due date. ...
Written agreement in which the lessee pays rent to the lessor for the use of real property for a stated time period. An example is the tenant's rental of an apartment or office space. ...
Last installment payment, substantially greater than the previous installment payments. The unpaid balance of a long-term loan is paid off in a lump sum at the end of the loan term. ...
In an electrical system, the connection box where all the circuit systems are installed with a series of electrical breakers. The major distribution or collection duct in an ...
Tank placed beneath the ground to accumulate sewage. ...
Borrower's right to redeem his property by immediately paying off the loan balance and any related costs. ...
Ratio of annual mortgage payments divided by the initial principal of the mortgage. This only applies to loans involving constant payment. For example, a $500,000 loan with an annual ...
Have a question or comment?
We're here to help.