What are the two types of loans?

The correct identification of the two types of loans is closely connected to how they are structured and repaid. Close-end and open-end loans represent fundamental categories that define the terms around borrowing and repayment.

Close-end loans refer to loans where a borrower receives a specific amount of money upfront, agrees to repay it over a predetermined period, and cannot borrow additional funds on that same loan once it's issued. This structure is typical in personal loans and auto loans, where the loan amount and payment terms are clearly defined, leading to a fixed payment schedule until the loan is fully repaid.

On the other hand, open-end loans allow for more flexibility regarding borrowing and repayments. With these loans, borrowers have a credit limit and can borrow against it repeatedly as long as the total amount borrowed does not exceed the limit. Common examples include credit cards and home equity lines of credit (HELOCs). In this scenario, borrowers can make withdrawals, pay them down, and then borrow again, creating a revolving line of credit.

Understanding these two primary types of loans is essential in consumer lending, as each type serves different financial needs and is structured in different ways. This classification helps consumers and lenders navigate the lending landscape effectively.