What Is Closed-Ended Credit In Real Estate?

In the real estate world, the term closed-ended credit includes monetary loans and certain forms of credit, as financial publication Investopedia reported. The types of credit included under the closed-ended definition are those debts requiring that the money be disbursed in total upon the closing of the loan. Once the loan closes, the obligation will be due for repayment. Additionally, the borrower must pay off other fees. Typically, these fees include both interest and finance charges and are due by a specific deadline.

Although closed-ended credit is a common descriptor for this type of debt, it is also known by other names. Some people may have heard of installment loans or secured loans, which are also types of closed-ended credits. As the Legal Information Institute reported, a closed-ended loan is usually used to facilitate a debtor reaching a specific goal or paying for a specific item, such as a real estate property.

Difference between closed-ended and open-ended credit

A given borrower may also opt to pursue an open-ended credit, or loan. In contrast to the closed option, an open-ended loan reflects the circumstance in which a debtor borrows on several occasions indefinitely within a set monetary limit, as can be the case with credit cards, according to Investopedia. Open-ended loans allow people to determine when and how much they borrow, which can provide more flexibility for the project or purchases they have taken on.

Moreover, as Experian, the consumer credit reporting company noted, when a borrower opts for an open-ended or a closed-ended loan, they do so with certain understandings. Of course, both debt options come with their own benefits and burdens. Factors for making this economic decision may include an individual's purpose for borrowing the funds in the first place and flexibility concerns. In this instance, the term flexibility refers to the borrower's purchasing and repayment needs and possibilities.