closed-end loan
A closed-end loan is a loan given with a specified date that the debtor must repay the entire loan and interest . These loans are normally disbursed all at once in order for the debtor to buy or achieve a specific thing, and often, the creditor gains rights to possess the item if the debtor fails to repay the loan. In contrast, an open-ended loan is when the debtor borrows multiple times without a specified repayment date, like with a credit card. Examples of closed-end loans include a home mortgage loan, a car loan, or a loan for appliances.
It should be noted that while an open-end loan allows payments at any time without penalty, a penalty fee may apply when seeking to prepay a closed-end loan. Additionally, because an open-end loan offers borrowers greater flexibility for repayment compared to a closed-end loan, it can potentially carry greater risk for a lender. To minimize the risk of a borrower’s default , obtaining an open-end loan may require a better credit history and/or credit score .
[Last reviewed in January of 2025 by the Wex Definitions Team ]
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