Type Of Credit
There are two categories of credit: open-end and closed-end. Before we look into these two categories of credit, you must understand first the most important parameter that can be used compare each type of loan and help you make the right decision on which loan to sign up with. This parameter is called “Annual Percentage Rate” or APR.
Annual percentage rate (APR)
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The finance charge rate may be as high as 25 percent or as low as 4 percent, but when the rate is stated as an annual percentage rate, or APR, you can easily compare one loan to another. In general, the more credit worthy your are, the lower your APR will be. Some lenders charge a fixed APR, while others levy a finance charge that rises and falls based on the movement of an underlying index.
Open-End Credit
Open-end credit also known as "revolving credit", provide a line of borrowing that you can tap into at will and pay back as quickly or slowly as you want as long as you make the minimum payment required each month. Some examples of Open End Credit include:
- Credit Cards
- Home Equity Credit Lines
- Store Specific Credit Cards
The size of the finance charge is generally agreed upon in writing before the open end credit account is issued. Each month, you receive a bill from the lender specifying the total amount you owe, the interest you must pay, and your minimum payment. To stay current, you pay your bills responsibly over time; the lender will probably increase your credit line, giving you more borrowing power.
When shopping for open-end credit, compare the following elements of one loan with the same elements of another loan to get the best deal.
Closed-End Credit
Another type of credit is known as closed-end credit, provides a fixed amount of money to finance a specific purchase for a preset period of time. Closed-end Credit needs to be repaid in full (along with any interest and finance charges) by a specified future date. Most real estate and auto loans are closed-end.
Closed-end loans offer both fixed-interest rates and variable-interest rates. Fixed-rate loans guarantee that your will pay the same interest rate for the life of the loan, which protects you if the general level of interest rates rises. Adjustable-rate loans charge interest rate that shift up or down based on the movement of an underlying index, such as prime rate or yields on Treasury securities. Normally, adjustable rate loans have interest rate that is lower that fixed interest rate loan offer. If you are getting closed-end credit with an adjustable interest rate and interest rate remain or fall, you are saving interest for your loan, but in vice versa, if interest rate is increased, you will pay more interest. Adjustable-rate loans normally have annual caps or lifetime caps, so you know how high your APR can rise each year and over the life of the loan.
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