Which Of The Following Is An Example Of Closed-end Credit - T-Tees - Your Answers Await, Life's Questions Unraveled

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How does closed-end credit work?

We’ve all been there — you want to make a purchase, but you don’t have the funds to buy it today. However, there are some things you can’t live without — a home, a car or maybe that expensive ring you’ll need when you propose to your loved one.

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That’s where closed-end credit comes into play (more commonly known as loans — for example, installment loans, personal loans or home improvement loans). This is where you receive all the funds at once with an agreement to pay back the loan in monthly installments over a set period of time, in addition to interest and any other fees.

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The terms of the loan are agreed upon by you and the lender. Not all loans work the same way — for example, the amount you’ll be approved for, the annual percentage rates (APRs) and the date you must pay it all back are drawn up in your agreement. If you’re making a down payment (which could be required by your lender), such as towards a car, this can also affect the terms of your loan.

Finally, your lender will run a hard inquiry on your credit (meaning they’ll be accessing and reviewing your credit score and credit history) to help determine these details. The better your score, the greater the opportunity to access lower APRs and greater loan amounts. Be aware that when a hard inquiry is run, you may see a slight drop in your credit score.

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In this article, you will learn about:

Examples of closed-end credit
Benefits of closed-end credit
Drawbacks of closed-end credit
How closed-end credit affects your credit score

Examples of closed-end credit

The benefits of closed-end credit

Closed-end credit can open up doors for you and may even be necessary depending on what life throws at you. With closed-end credit, you can:

Make your purchase today and get the benefits of having your purchase now rather than later. By making your payments over time, you can have access to purchases or funds right away, given that you’re approved for the credit. This is similar to how you have access to funds with a credit card; however, credit cards have revolving credit (replenishes as you pay), and closed-end-credit does not.
Have fixed interest rates depending on your loan. In most cases, for as long as you have your loan, you’ll be paying the same rate of interest. You won’t be held captive by macroeconomic factors that can sometimes bring sudden shifts to interest rates and affect how much money you might owe, which can happen with credit cards that have variable interest rates.
Build up a strong credit history. You can do this by diversifying your credit mix and showcasing your reliability. Because your credit score is heavily affected by payment history and credit mix, having a record of regularly making your payments in full can help improve your score over time.

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The drawbacks of closed-end credit

Closed-end credit is not like open credit, where you can access more funds as you pay them back. The drawbacks of closed-end credit include, but are not limited to:

You only have access to the funds agreed upon between you and your lender — these funds don’t replenish as you pay them back.
Closed-end credit agreements come with fixed monthly payments. While you can put more than the fixed amount towards your loan each month, you may not be able to put less. For example, if you agree to pay monthly installments towards your car loan, there may be little wiggle room if you find that you can’t afford those payments anymore.
You could hurt your score. If you’re not careful, you could negatively impact your payment history, which is a major factor in calculating your credit score. Making late payments or missing payments towards closed-end credit accounts can decrease your credit score and may even lead to having a derogatory remark listed on your credit report. These remarks are negative items that indicate to potential lenders that you are a higher risk.

How does closed-end credit affect your credit score?

Depending on your financial behaviors and habits, closed-end credit can either help improve your score or could damage it.

Closed-end credit can positively impact your credit score if you:

Make your payments on time
Have multiple forms of credit—for example, an auto loan and student loans that you pay back regularly and on time

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On the other hand, closed-end credit can decrease your credit score if you:

Make your payments late
Miss your payments
Don’t meet your monthly installments
In some cases, you could miss enough payments towards a secured loan that your lender might repossess your purchase and add derogatory remarks to your credit report

Bottom line

Closed-end credit can give you the opportunity to make major life decisions, whether that’s buying your first car, going to college, buying a home or helping pay off large bills. If you’re responsible with your payments and practice good financial habits, you can use closed-end credit to your benefit and maybe even improve your credit score in the process.

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