Open-end loans provide funds for projects, vacations, hobbies and more. They deliver access to an ongoing line of credit that can be redrawn and re-purposed anytime, if loan conditions are being met. Credit card owners may not be aware, but they also rely on a line of credit and an open-end loan. In other words, if a loan is flexible and doesn’t have an exact date for repayment, it is an open-end loan.
Once an open-end loan is established, any portion of the money can be used, or it can remain untouched and accessible until needed. An open-end loan is the convenient way to access money that can be multi-purposed, although borrowing power is ultimately decided by equity and the ability to service the loan. Open-end loans are a popular and safe loan option favoured by banks and mature customers who have established equity, usually through home ownership.
Open-end and closed-end loan options
A loan can be open-end or closed-end. Closed-end loans usually involve a specific amount of money borrowed that is paid back by instalments in a fixed schedule. Most car loans are closed-end loans, for example. Open-end loans are a revolving line of credit issued by a bank or financial institution. The line of credit can be accessed as required and reused as repayments are made.
Open-end unsecured loan
Credit cards are the most common example of open-end unsecured loans. They are not attached to collateral for security, so credit card approval is based on the borrower’s credentials rather than personal assets or equity. Credit score and creditworthiness determine credit card limits, interest rates, and other considerations related to open-end unsecured loans.
Open-end secured loan
When the line of credit is attached to collateral, an open-end loan can function admirably, while also providing borrower and bank with security. A home equity line of credit is a common open-end secured loan, where value of collateral or equity is diverted to consolidate holdings, expand horizons, or simply enjoy a well-deserved holiday. A secured open-end loan is useful and very tempting, however, any money borrowed needs to be repaid. Collateral used for the loan belongs to the bank once funds are spent, and inability to make repayments can lead to loss of the entire property in a worst-case scenario.
Open-end loan limits and payments
Although an open-end loan doesn’t have a specific payoff date, access to money is still limited. For example, if you have a $50,000 line of credit and spend $30,000, you will have $20,000 in reserve to use when required. Repayments lower debt while also circulating funds to be re-used for future projects without the need to apply for a new loan. Depending on the terms of the loan, customers are typically required to make monthly payments to service the loan.
Although an open-end loan is flexible, there are conditions and guidelines imposed by lenders to regulate payments and avoid defaults. On the plus side, borrowers only pay interest on the portion of the loan used, and not on any loan funds that remain in reserve. If you have used $20,000 of a $50,000 home equity open-end loan, you will still have $30,000 ready to be used that isn’t drawing interest, making repayments more effective and interest negligible.
Other open-end loan advantages
With an open-end loan, equity and collateral provide the financial push required to complete large projects. An open-end line of credit will also make other purchases practical, such as buying a new car or boat with available funds, and only paying home loan interest rates instead of exorbitant personal loan or car loan rates.
Astute investors also often use a line of credit for share market transactions. Shares are purchased using equity, and when shares are sold the money is paid into the line of credit, reducing the balance and increasing equity. With interest rates remaining at historical lows, this use of equity is effective financing when managed expertly.
An open-end loan provides real access to funds that can result in financial gain. With fiscal management, home equity can be unlocked to create a profitable investment portfolio along with associated lifestyle improvements. An open-end loan can help expand horizons, consolidate wealth, or simply provide the opportunity to enjoy life to the fullest.
