What is an Open-End Credit?
Open-end credit is a preapproved loan that a bank or financial institution lends to a borrower. The open-end credit, also known as a revolving line of credit or a line of credit, is the preapproved amount that is defined in the agreement between the borrower and the lender, i.e. the bank or financial institution.
Understanding Open-End Credit
Open-end credits are very much similar to credit cards as the borrowers are given the right over how much they can borrow. Also, the unused amount of the open-end credit does not attract any interest. This gives borrowers more control over when to borrow credits and save on interest payments, unlike closed-end credits, such as auto loans and home loans.
Open-end credits can be issued to borrowers in one of the two forms - a credit card and a loan. Credit cards offer more flexibility as borrowers can access the funds as soon the due payment is repaid. This makes credit cards the most sought after forms of open-end credits in the consumer market.
However, such is not the case on the business side of the spectrum. Various metrics and criteria are considered before determining the eligibility for the maximum amount before approving a line of credit. These metrics can include various aspects, such as the business entity’s current revenue, existing collaterals, and the value of other tangible assets owned by the entity.
Open-End Credit vs Closed-End Credit
In closed-end loans, the borrower is given the entire loan amount upfront after which he/she is required to repay the owed amount in the form of instalments.
However, unlike open-end credit where the borrower can withdraw the funds again after repayments, closed-end credits do not allow the funds to be withdrawn again for the second time. This is why open-end credits are often referred to as a revolving line of credit.
