Legal Definitions - open-ended loan

An open-ended loan is a type of borrowing arrangement that does not have a predetermined, fixed end date for repayment of the entire principal amount. Instead, it allows a borrower to repeatedly draw funds, repay them, and then borrow again up to an approved credit limit. Interest is typically charged only on the amount of money currently borrowed, not on the entire available credit limit. This structure provides flexibility, as the borrower can manage their borrowing and repayment schedule over an extended period, adapting to their ongoing financial needs.

Here are some examples to illustrate open-ended loans:

• Home Equity Line of Credit (HELOC)

  Imagine a homeowner who has built significant equity in their house. They might apply for a Home Equity Line of Credit (HELOC) for $75,000. Over the next several years, they could draw $20,000 to fund a major home renovation project. Once the renovation is complete and they repay that $20,000, they still have access to the remaining $55,000 of their credit limit. Later, they might decide to draw another $15,000 to cover unexpected medical expenses or their child's college tuition. This cycle of borrowing, repaying, and re-borrowing can continue for an extended period, often 10-20 years, without a specific date when the entire $75,000 facility must be permanently closed or fully paid off.

  How this illustrates the term: This is an open-ended loan because there is no fixed maturity date for the entire credit facility. The homeowner has continuous access to funds up to their approved limit, allowing them to borrow and repay multiple times over many years based on their evolving financial needs, rather than being tied to a single, one-time loan with a set repayment schedule.

• Business Revolving Credit Facility

  Consider a small manufacturing company that experiences seasonal fluctuations in its cash flow. To manage these variations, the company establishes a $300,000 revolving credit facility with its bank. During peak production seasons, when they need to purchase large quantities of raw materials and pay for increased labor, they might draw $100,000 from the facility. As they sell their products and receive payments, they repay the $100,000. Later in the year, if an unexpected equipment repair is needed, they might draw another $50,000. This facility allows them to continuously access and repay funds as their business needs dictate, without a specific end date for the overall borrowing agreement.

  How this illustrates the term: This facility is an open-ended loan because it provides the business with ongoing access to funds up to a set limit, without a fixed end date for the entire borrowing arrangement. The company can repeatedly borrow, repay, and re-borrow money, adapting to its operational cash flow requirements rather than being constrained by a single, term-limited loan.