What are Closed-End Loans

Closed-end loan is a legal term applying to loans that cannot be modified by the borrower. Specifically, the borrower cannot change the number or amount of installments, the maturity date and the credit terms. If the borrower does negotiate a modification of the loan, the borrower will be subject to penalties as determined by the lender. 

Examples

Examples of closed-end loans typically appear in installment loans. Mortgages, auto payments and student loans are the most common. Personal loans are also often close-end. They have a set interest rate, usually determined by the credit score and other financial information provided on the loan application.

Why It Is Important

Understanding terms of closed-end loans is important for many reasons, but most importantly to understand fees and penalties and to assure fair lending practices. You need to know what consequences you will face for modifying your loan. You also should realize legal processes, such as those required by the Truth in Lending Act, set different requirements for closed-end and open-end loans. 


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