Chapter 16.2
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Open-ended credit – An agreement to lend the
borrower an amount up to a stated limit and to
allow borrowing up to that limit again,
whenever the balance falls below the limit.

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Borrower is to repay amount borrowed within 30
days? (open 30 day accounts)
Borrower is to repay amount borrowed over a period
of months or years?(revolving credit)

Open 30 –day
accounts


Revolving Credit

Must pay full balance
each month when bill
is received

Consumer has option
of paying in full or
making payments at
least as high as the
stated minimum
Most all-purpose
credit cards like
visa/Master Card
and department store
cards(Penny’s)
OPEN-END CREDIT



Loan is a reflection of
varying types of charges
made by borrower
Allows continuous
borrowing and varying
repayment amounts
Example: Credit cards
that allow continuous
charging like “Visa”
CLOSE-END CREDIT
Loan is for a specific
amount and must be
repaid in full by a stated
due date
 Repayments are fixed
amounts(installments)
that include principal
plus interest
 Example: Buying a
refrigerator using credit
or buying a car

OPEN-ENDED CREDIT
No down payments
required
SERVICE CREDIT
Having a service done
now and paying for it later
Example: telephone and
utility services which usually
offer budget plans
resulting in lower monthly
payments

CLOSE-ENDED CREDIT



Usually a down
payment is required
The product purchased
with loan becomes
collateral for the loan
Often referred as an
installment loan
Retail Stores (department stores, restaurants, and
most service businesses)
Often offer their own credit cards and also
accept the major credit cards. Often give
discounts or incentives to use their own
credit card
Major Credit Card Companies(master card/visa)
Often has cash advance option and access
checks
Banks and Credit Unions (offer credit cards and
installment loans)


Two Types of small loan finance companies


Consumer Finance Company
Sales Finance Company
Usually charge higher interest rates for the use of their
money. Why? They are willing to take higher risks that
banks and credit unions are not willing to take
If someone is unable to get a loan at a bank or credit
union, they can often get one at a small loan company.
Consumer Finance
Company

Makes mostly consumer
loans to customers
buying consumer
durables (items
expected to last several
years…car,refigerator)
Sales Finance Company

Makes loans through
authorized
representatives. For
example, GMAC
finances General Motors
automobile dealers and
their customers.


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Beware of these lenders
They are unlicensed
They charge illegally high interest rate
They just may break your legs if you don’t pay
the money back!



Legal lenders that make high-interest loans
based on value of personal possession pledged
as collateral
Loan amount is usually set at a value
considerably less than the value of item
pledged.
Some Pawn shops give only 10 to 25% of value
of article pledged. Most give no more than 50%
to 60%.

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Most common source of cash loans.
Includes parents, other relatives, friends, etc.
May or may not charge interest.
LIFE INSURANCE POLICY



Policy holders can
borrow at low interest
rates against the value
of their policy
Loan does not have to
be repaid
Amount of loan will
reduce value of policy
CERTIFICATE OF DEPOSIT



Certificate used as
collateral
Interest charged is
usually only 2 to 5 %
above the interest rate
received oncertificate
Certificate retains full
value