Open Ended versus Closed Ended Loans

Often people do not compare loans in the sense open ended and closed ended but it is worth thinking about which loans fit into these categories and whether they are generally a good or bad type of loan for you.

An open ended loan is one which is always available to you and you can draw from it whenever you like. Examples of these are credit cards and overdrafts. Although you have a limit to how much you borrow there is no minimum and you can borrow whenever you like and as much as you like up to the credit limit. A close-ended loan is one where you get a one off sum of money which is a fixed amount. The repayments are different too with the open ended loan having no fixed repayment schedule and the close ended loan having set repayments at set times.

When you need a loan it can be tempting to look at the open ended loans you already have available to you in the form of credit cards or overdrafts. It is easy to use these as you do not have to apply and the money is there right away. You will not have to think about when it needs to be paid back really either. The overdraft will be paid back as money goes into the account and the credit card company will take a small minimum payment each month and it will be up to you to decide when you are ready to make bigger repayments and actually get on top of the debt. This can seem like a great thing because it is easier to manage the debt. However, it means that you can delay repaying it and this can be extremely costly. The interest rates on this sort of account tend to be high compared with closed ended loans. This means that although they are more convenient to organise and you do not have to consider when you will pay it back, it may not be as good as it seems. With regular repayments set on close ended loans it means that you will have to find a way to make them. This could mean that you will budget well and pay it back when necessary and be free of a loan more quickly, however, it could mean that you struggle each month to find the necessary money to pay the loan it could be a miserable time.

It is therefore worth thinking really hard about which type of loan would be the best for you. You need to bear in mind that it will need paying back eventually and having a fixed repayment arrangement could make that easier for you. However, you need to consider where you will get the money from to be able to make these repayments when they are due. You may need to find another source of income or spend less money in order to do it. If cost is a worry then you will normally find that a closed ended loan is cheaper because the interest rate is lower. You are also more likely to pay it back more quickly as you will have regular repayment dates compares with an open ended loan where there is no pressure to get it paid back. If you feel that you will not be offered a loan, perhaps due to your credit record or you need the money really quickly, then using an open ended loan could be useful. However, you do need to make sure that you have a repayment plan even for an open ended loan so that you can manage the debt. If you do not think about how you are going to repay then you could end up with an outstanding debt for a long time which could end up being extremely expensive. It can be difficult to get the right balance between convenience and cost but if you give it some thought then you should be able to come up with the right decision for you. Do make sure that you do some research and compare different types of loans and understand how they differ so that you can make the best decision for you and your current circumstances.

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