May 02, 2025
Closed-end credit allows you to borrow a set amount of money and pay it back in a fixed amount of time. Also known as an installment loan, this kind of loan is called “closed-end” because it has a firm end date by which the loan must be fully repaid. The total payment for the loan includes any interest, finance charges, or other fees that might be charged.
Closed-end credit is often used to pay for major expenses (like a home). Another common use for a closed-end loan is to combine multiple revolving debts into a single loan. This can help you pay back debt with one loan that has a set monthly payment amount and a fixed end date. You borrow a set amount of money, and unlike a credit card, you can’t add to the balance.
By contrast, revolving loans, such as credit card debt, typically allow you to continue borrowing money without a set end date for full repayment. Some borrowers choose to consolidate their revolving loans into closed-end credit to make debt more manageable.
Closed-end credit works by allowing you to borrow money through either a secured or unsecured loan. Secured loans are backed by collateral, such as a house or car, which could be taken by the lender if you are unable to pay back the loan. Unsecured loans do not involve collateral.
Once you are approved for a closed-end loan, you typically receive the funds in one lump sum. You then repay the loan, typically with interest, in monthly installments over the loan’s repayment term.
The planned final payment will bring your loan balance to zero. You can usually pay off your loan early. But it’s good to be cautious and read the fine print, as some loans may charge prepayment penalties. When the loan is paid in full, your lender will close the account.
There are several types of closed-end credit that are commonly used.
Auto loans are typically used to buy or refinance new or used cars, as well as motorcycles, boats, and other vehicles. These are secured installment loans that are repaid over a fixed period of time, usually from 24 to 84 months. The average term of an auto loan in the fourth quarter of 2024 was about 68 months for a new car and nearly 67.5 months for a used car.1
A traditional mortgage is a loan that can be used to purchase or refinance a house. This type of loan is also secured, in this case by the value of your home. For most types of homes, the average repayment term for mortgages is typically 15, 20, or 30 years.2
Student loans are used to pay for post-secondary education and sometimes even K-12 education. They are typically installment loans paid back over a set period of time. Federal student loan terms range from 10 to 30 years for consolidated loans, which may be used to combine multiple loans, or 10 years for non-consolidated loans. Check with your lender for details.3
A payday loan is typically a short-term loan of $500 or less, intended to provide funds until your next paycheck. While it usually does not require a credit check, it can often come with high fees or finance charges.
Closed-end credit involves a loan for a set amount of money and period of time. Open-end credit is typically a revolving line of credit up to a certain limit and may not be restricted to a specific time for the loan to be repaid. Credit cards and home equity lines of credit (HELOCs) are common examples of open-end credit.
Open-end credit is also known as revolving credit. The percentage of your available revolving credit that you are using is your credit utilization ratio. Because of the way your credit report is structured, open-end credit can affect your credit utilization ratio. Your credit utilization ratio may affect your credit score.
Closed-end credit may be either secured or unsecured. Approval and interest rates for both are based on your credit score, debt-to-income ratio, and other measures of creditworthiness.
Secured loans are backed by collateral, such as a home or a car, that can be used as payment to the lender if you don't pay back the loan.
Unsecured loans do not require collateral. Personal loans and credit cards are typically unsecured.
As you decide which type of loan is right for you, consider the pros and cons of a closed-end loan. You will want to know if the payments fit your budget and how you can avoid unexpected costs like fees and penalties. This will help ensure that you are comfortable as you pay off the loan.
It is important to understand the true cost of the loan. This will help you accurately create a budget to meet your financial goals. Before applying for a closed-end loan, you will want to calculate the amount of money you need and how long you need to pay it back. You should also check your credit score and research the interest rate and any fees. Fees charged by the lender may affect the annual percentage rate (APR) of the loan. Keep in mind that the repayment terms for loans can vary.
Depending on the reason for the loan, closed-end credit could be the best option for you. Before you decide, it’s important to understand the different types of loans available. Then you can determine which one is the best fit for your budget and the way you manage your money.
As you weigh the pros and cons, keep in mind the impact that taking out a loan may have on your credit history, credit score, and overall budget. If you need to consolidate debt or make a major purchase, a closed-end personal loan may be right for you.
Discover® Personal Loans helps you design your loan around you. Pick the amount you need and choose how long you’d like to repay your loan—from 36 up to 84 months. With Discover Personal Loans, for example, if you get approved for a $15,000 loan at 12.99% APR for a term of 72 months, you’ll pay just $301 per month.
Want to learn more before choosing your loan? Check out five basic things you should know about closed-end personal loans from Discover.
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The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover, a division of Capital One, N.A., (Discover) or its affiliates.
