A closed-end loan is a loan with a fixed term, requiring periodic fixed payments and having an agreed upon interest rate. It is “closed” because the loan is paid off in full at the end of the term and cannot be rolled over or extended. These types of loans can be secured or unsecured, and may involve collateral or require a downpayment.
Closed-end loans are typically used for one-time, or discontinued, expenses. Examples may include the purchase of a car or the funding of a remodeling project. Common closed-end loans include mortgages, auto loans, home equity loans and personal loans.
Secured vs Unsecured Loans
Secured loans involve collateral, such as a car for an auto loan or a home for a mortgage, and the lender will have the right to take possession of the collateral and sell it if the borrower does not fulfill the loan obligations. Unsecured loans do not require collateral and are not backed by collateral – this means that the lender has no legal claim to any property of the borrower and risk is involved in issuing the loan.
Benefits and Drawbacks of a Closed-End Loan
The benefits of a closed-end loan include a set repayment amount each month, fixed repayments over a certain period, and it allows the borrower to plan for their finances over the loan’s duration. On the downside, borrowers may find themselves stuck in loans with unfavorable terms, and the lack of rollover can lead to higher overall interest rates.
Conclusion
A closed-end loan is a type of loan which requires fixed repayments up until the loan is paid off at the end of its term. Depending on the loan, it may be secured or unsecured and its responsibility will be meted out determined by risk and benefit. Those looking to enter into a closed-end loan agreement should weigh their options carefully.