Closed-End Loan
Closed-end loan summary:
Closed-end loans have fixed repayment terms with a set number of payments.
Your monthly payment for a closed-end loan is the same each month.
Examples of closed-end loans include personal loans, auto loans, and home mortgage loans.
Closed-end loan definition and meaning
A closed-end loan is a type of loan that has a set end-date and fixed repayment terms. They're also called installment loans, since you pay them back in set monthly installments.
Once you pay off a closed-end loan, you're done. If you want to borrow more money, you'll need to apply for a new loan. In contrast, an open-end loan can be used, repaid, then reused without needing to get a new loan.
Key concept: Money you borrow with a set end-date and fixed repayment terms.
Closed-end loan: a comprehensive breakdown
Most closed-end loans follow the same basic structure:
Apply for the loan.
If approved, the money is sent to your bank account where you can put it to use.
You repay the loan with fixed monthly payments for the amount of time agreed on with the lender.
Once you completely repay the loan, the contract is finished.
If you want to borrow more money, you get a new loan.
Common examples of closed-end loans include:
Personal loan. Personal loans are typically unsecured loans. They are the most flexible type of closed-end loan since you can generally use them for anything, including paying off credit card debt.
Auto loan. Auto loans are secured installment loans that use the vehicle as collateral (something valuable that backs up a loan). Auto loans can only be used to purchase a vehicle.
Home mortgage loan. Home mortgage loans are secured installment loans that use the property as the collateral or security. Home mortgage loans can only be used to purchase personal property.
Home equity loan. Also sometimes called a second mortgage, a home equity loan is a secured installment loan that uses your home's equity (its value over the amount you still owe on it) as collateral or security. You could use a home equity loan for many different things, including home repairs or debt consolidation.
Secured and unsecured closed-end loans
Closed-end loans can be secured or unsecured.
A secured loan uses something of value that you own, such as property or cash, as collateral. In other words, you put up ownership of the asset as security for the loan. If you don't stick to the repayment terms, you agree to forfeit ownership of your collateral to the lender.
For example, if you get an auto loan, the vehicle is the collateral for that loan. If you stop making payments, the lender can repossess your vehicle and sell it, keeping all the profit.
An unsecured loan doesn't require any collateral. Without something to secure the loan, the lender takes on more risk that the loan won't be repaid. Unsecured loans tend to have higher interest rates than secured loans to balance the higher risk to the lender.
Closed-End Loan FAQs
How is revolving credit different from an installment loan?
Revolving accounts, like credit cards, are generally reusable. You can borrow, pay down your balance, and then borrow again as long as the account remains open.
Installment loans come in a lump sum you receive upfront. If you want to borrow more money in the future, you have to take out another loan.
Are installment loans bad for credit?
Not necessarily. Applying for installment loans could temporarily reduce your credit standing. Over time, that effect lessens. On-time payments of an installment loan could be good for your credit, and accounts closed in good standing stay on your credit report for 10 years.
No one can make any guarantee about what will happen to your financial profile. Everyone’s situation differs. Your financial profile is based on a number of factors besides your bill-paying history and your current unpaid debt, including the number and type of loan accounts you have, and how long you’ve had your loan accounts open.
What happens if you pay off an installment loan early?
You could save money on interest and pay off your loan early by making extra payments. Once the loan is repaid, it remains on your credit report for 10 years. Check to make sure your loan doesn’t have prepayment penalties that reduce the amount you save.
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