The "whats", "wheres" & "hows" of open-ended loans

Open-end loans offer Aussies financing for all kinds of exciting things.

Be it a holiday or funds for a project car that you’re tinkering away with while burning the midnight oil, these loans are there to help you along financially.

Essentially open end loans offer an open and ongoing line of credit that can be re-purposed at any point, provided you are meeting the conditions of the loan. In a nutshell? If someone is paying off a line of credit with flexible repayment amounts and no particular end date, it can be defined as an open-end loan. All you Aussies with credit cards, those are open-end loans.

A gift that keeps on giving

The great thing about an open-end loan is that it’s the gift that keeps on giving! You don’t need to use the entire amount all at once, in fact, you don’t need to use it at all until the time need arises. However, it’s there, safe in its abundance, waiting for your unexpected cash emergencies, leisure desires, and other financial needs to come up.

It’s tremendously convenient for those who are able to manage their finances well, however, need a safety net that is easily accessible on a whim. One of the factors that should be considered, is the amount you’re able to borrow. This amount will largely depend on your ability to adequately repay the loan. That said, they’re a secure option that has become very popular amongst individuals that need rolling and on-going access to funds.

Open-end versus closed-end loans

Not only can a loan be open-ended, it can also be a closed-end loan. The difference is that with closed-end loans, it’s typically a specific loan amount over a dedicated period for a specific singular need. It’s repaid via monthly instalments of the same size until fully settled. Home loans and vehicle loans are perfect examples of a closed-end loan. Open-end loans as mentioned means opening up the same credit you've used as you pay it off.

What is an open-ended unsecured loan?

Firstly, an unsecured loan is one that isn’t attached to any of your assets or other collateral. There is no security on the loan, meaning that creditworthiness largely comes into play when these loans are considered for approval. If you haven’t already guessed it, the neatly nestled credit card in your wallet is the best example of an open-end unsecured loan. Your credit score and income will determine the credit limit the bank awards you, as well as the interest rate you’ll need to consider.

Open-ended secured loans

When your credit is attached to some form of security, you can be sure that you’ll attract favourable interest rates as well as credit limits. It’s less risk to the bank since they have collateral in the event that you are unable to fully settle the loan. A good example of this type of loan is home equity. The collateral used for the loan becomes the property of the bank when the funds are spent and returned upon settlement. Therefore, any inability to repay the loan can result in you losing your home.

Open ended loans - payments and limits to consider

There is no specific settlement date, however, you cannot spend to your heart’s content! The limit is the limit. If you have spent $10,000 of the available $20,000 credit, you will only have access to $10,000. If you pay $500 back, then you free up a further $500. It’s that simple! The circulation of money can also be referred to as a revolving loan. Regardless of having available credit, you are still required to make a minimum repayment each and every month. Borrowers don’t pay interest on the available credit, only on the portion of the loan that they use. Be wary not to default on any payments, as you will incur penalties.

Further benefits of going the open-end loan route

Equity and collateral will certainly cater to the funds you require to complete those larger outstanding projects. Not only that, but it will also make other purchases seem more rational and easier to achieve. Take purchasing a car, for instance, you simply access your available funds, while only paying home loan interest rates as opposed to exorbitant car loan rates.

Home equity loans in Australia 

Typically, some of the more insightful investors have been known to make use of a line of credit for sharing in market transactions. These shares are procured through the means of equity, and upon the shares being sold, the cash is directly paid into the line of credit. The result? A drastically reduced balance hand in hand with an increase in equity. Home loan interest rates are famously low; hence this route is always favoured when it comes to investment financing.

This line of credit also assists with certain financial gains, if used well. Home equity has statistically opened up vast amounts of profitable portfolios for individuals. Not only do they assist in wealth gain, but they too can help to consolidate and expand on your lifestyle in the best way possible!