Legal Definitions - closed-end loan

A closed-end loan is a type of credit where a borrower receives a single, one-time lump sum of money for a specific purpose and agrees to repay the entire amount, plus interest, over a predetermined period. Unlike a credit card or line of credit, which allows for repeated borrowing up to a limit, a closed-end loan has a fixed repayment schedule with a clear end date. Once the loan amount is disbursed, no further funds can be drawn from it. Often, the item purchased with the loan serves as collateral, meaning the lender can take possession of it if the borrower fails to make payments.

Here are some examples to illustrate how closed-end loans work:

• Example 1: Boat Purchase Loan

  Imagine someone wants to buy a new fishing boat. They apply for a loan for the exact purchase price of the boat. Once approved, the lender provides the full amount as a single payment directly to the boat dealership. The borrower then agrees to make fixed monthly payments over, for instance, a seven-year period until the entire loan and interest are paid off. The boat itself typically serves as collateral for the loan. This is a closed-end loan because it involves a one-time disbursement of funds for a specific item, with a set repayment schedule and a definite end date.

• Example 2: Business Equipment Financing

  A small manufacturing company needs to purchase a new, specialized industrial machine to expand its production capabilities. The company secures a loan for the full cost of the equipment. The bank disburses the entire loan amount to the equipment supplier upfront. The company then repays the loan in fixed installments over a five-year term, and the new machinery typically acts as collateral for the loan. This arrangement is a closed-end loan because it provides a single sum for a specific business asset, with a clear, fixed repayment plan and a defined maturity date.

• Example 3: Personal Loan for a Wedding

  A couple decides to take out a personal loan to cover the significant costs associated with their wedding, such as venue rental, catering, and photography. They receive a single lump sum, for example, $25,000, from a bank or credit union. They then agree to repay this specific amount, plus interest, through fixed monthly payments over a three-year period. While this type of personal loan might not always be secured by an asset, it is still a closed-end loan because it involves a one-time disbursement of funds for a specific event, with a clear, fixed repayment schedule and a definite end date.