Open-End Loan
Open-end loan summary:
Open-end loans let you borrow money repeatedly without needing a new loan.
Examples of open-end loans include credit cards and home equity credit lines.
Using a lot of your available limit can cause high utilization, which can hurt your credit scores.
Open-end loan definition and meaning
An open-end loan, often called revolving credit, is a type of loan with no set end-date. You can borrow money, up to a certain limit, and repay it over time. Then you can borrow money again from the same line of credit.
Key concept: A revolving or flexible line of credit that lets a borrower repeatedly draw from and repay funds up to a pre-approved credit limit.
Open-end loan: a comprehensive breakdown
A few common examples of open-ended loans include:
Credit cards. With a credit card, you make purchases using a line of credit. You can make purchases up to your credit limit. As you repay your balance, you can then make more purchases using your available credit.
Personal line of credit. A personal line of credit is similar to a credit card, except you typically use checks and bank transfers to move money rather than making purchases directly.
Home equity line of credit. A home equity line of credit (HELOC) is a secured open-end loan that uses your home's equity—its value above the amount of your mortgage loan—as the collateral (the asset that backs the loan). HELOCs operate similarly to a personal line of credit in that you can use checks or transfers to use your credit line.
Open-end loan key characteristics
Borrow the amount you want, up to your limit
Pay interest only on the amount you use
You monthly payments are based on your borrowing
Use your credit repeatedly without applying for a new loan
May have variable interest rates that can change at any time
How an open-end loan impacts your credit
Open-end loans could impact your credit score in a few different ways:
Credit utilization. How much of your available credit you're using is called your credit utilization. If you’re using a lot of your credit limit and your utilization is high, that could be bad for your credit score.
Payment history. On-time payments could help your credit; late payments could hurt it. Open-end loans typically have a minimum payment you need to make before the due date each month.
Credit mix. It could help your credit to have a mix of open-end and closed-end credit types.
Open-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.
How do interest rates on revolving debt work?
Revolving debt interest rates can be fixed, meaning they don't change, or variable. Variable rates can go up or down over time. Credit cards typically have variable interest rates. A HELOC could have a variable or fixed interest rate.
Achieve personal loans and HELOCs have a fixed interest rate. A fixed rate gives you more predictable payments and protects you from rising interest rates in the future. No matter the kind of rate you have, you'd only pay interest on the balance that you owe.
What happens if I only make the minimum payment on my revolving debt?
Paying at least the minimum due on time each month is very important since late payments could hurt your credit score and result in late fees or other consequences. But the minimum payments on revolving debt might not be enough to make a dent in the balance, especially if you're continuing to borrow against your credit line or you've got a high interest rate.
Credit card minimum payments are so low, it could take years or decades to pay off the balance—so rather than a revolving door, you could end up on an endless hamster wheel of debt. If you pay more than the minimum, you could save money on interest charges and reduce your debt faster.
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