You might have an open-end loan and not be aware of it An open-end loan is simply a loan that does not have a specific date for repayment. If you have a credit card or a line of credit with your financial institution, you actually have an open-end loan.
While an open-end loan does not have a specific payoff date, it still limits the amount of money you have access to. For example, if you have a $20,000 line of credit based on the amount of equity you have in your home, you have $20,000 available. While you do not have to spend the whole $20,000, you cannot receive more than that without going back to your lender. One advantage of a line of credit over a traditional mortgage is that once you pay your balance, you can borrow from the credit line again without having to apply for a new loan.
Lenders typically require open-end loan customers make a payment each month. Depending on the terms of the loan, this payment may be an interest-only payment or, in the case of credit cards, a payment that pays the card fees for that month and a percentage of the balance on the account -- often 1 percent, according to the Boston Globe.
Truth in Lending Act
The Truth in Lending Act contain provisions regulating open-end loans. These regulations include requiring lenders to provide full disclosure regarding any fees charged to the borrower. Lenders must have procedures in place to make sure that the borrower receives his statement in time to make a payment before the grace period expires. Creditors must give borrowers notice at least 45 days before changing the terms of an open-end loan in a way that costs the borrower more money. However, lenders do not have to notify the borrower if the loan's interest rate is increasing after the expiration of a low-rate incentive program.
Credit Card Act
In 2009 the Credit Card Act passed into law; the law expands the regulations contained in the Truth in Lending Act. This legislation, specific to credit card accounts, requires lenders to provide borrowers with information regarding how long they will be paying on their account if they only pay the minimum payment. The customer's statement must also provide the amount he should pay if he wants to pay the full balance in three years. Lenders cannot raise your interest rate within the first year unless the account has an introductory rate, you are behind in your payment for 60 days or more, you do not fulfill the terms of a workout agreement, or the index tied to a variable-rate card increases. The Act also requires a set payment date that does not change and that requires that the lender pay off balances with a higher interest rate first.
While open-end loans give you easy access to money, they have their disadvantages. If you only pay the minimum due, you could pay well over the amount you borrow in interest charges alone. According to the Board of Governors of the Federal Reserve System, if you make the minimum payment on a $3,000 loan it will take 11 years to pay it off and you will pay approximately $4,745. Even if you do not carry a balance, future lenders might hesitate to approve a loan application because, according to Bankrate.com, you may use your available credit in the future and not be able to make your payments.
- Alabama Telco Credit Union: Types of Credit
- Consumer Financial Protection Bureau: Consumer Laws and Regulations - Truth in Lending Act
- Board of Governors of the Federal Reserve System: New Credit Card Rules Effective February 22
- Spectrum Federal Credit Union: Advantage Line of Credit
- Boston.com: Credit Card Minimum Payments Going Up
- Bankrate.com: How Credit Scores Work, How a Score is Calculated
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