There are many different types of loans and they can be categorised in many different ways. Open ended loans are those which have no repayment limit, compared with closed ended loans which have a repayment date. Examples of open ended loans would be credit cards and overdrafts.
With these types of loans there is no agreed repayment schedule, amount or end date. It means that it is up to the borrower to choose when they make repayments and how much they pay. With some types, such as credit cards, there is a small minimum monthly requirement but this will usually only be enough to cover the costs of the loan and will not repay any or very much of the outstanding debt.
These types of loans can be very attractive to many people because they can borrow money for a long period of time without having to worry about repaying it. They may think that they will just pay it back when they can afford it and then never get around to it. It can almost feel like it is free money and that they are able to spend it without worrying about paying it back. Some borrowers even think that the money on the credit card is there to be spent and then do not think about how they are going to repay it.
Although having easy access to money like this can be very useful, it can also be a big problem. If you keep using the money, without thinking about what you are buying with it or the cost, you could end up in a situation where you owe a lot of money. This could have all sorts of consequences in the future.
If you keep borrowing money, then you will get to a point where no one will lend you anymore. This will be because your credit record will have a reference to what you have borrowed and lenders will worry that you will not be able to make the necessary repayments. This means that if money is needed in an emergency; there will not be any money left to be able to borrow. It also means that if money is needed for a loan such as a car loan or mortgage, then the borrower’s credit record may be so bad that they will not be able to get these. A bad credit record can also affect other things as well as borrowing. It can make it harder to rent a property or even to get a job. It will certainly make it much harder to borrow money, not just in the short term but also in the long term.
The money will also need to be paid back eventually. This could become harder as more time passes. Not just because the debt may increase but also because financial commitments could increase over time. It may be that you have children, need a bigger home, lose your job, need to support other family members or other circumstances which limit your finances and this could mean that finding money to repay the debt could get harder. Of course, things may get easier, perhaps a pay rise, children leaving home, inheritance or other increases in income, but it is best to assume that things will get harder not easier, so that you can plan sensibly for the future.
It is also worth calculating how much the items purchased with these loans would actually cost once it is paid off. If you include the interest charges plus any other fees then it could mean that they cost far more than you would normally be prepared to pay for them. You may find that by the time you start thinking about paying off the debt, you cannot even remember what you bought with the money or it may be gone or broken. It can feel really nasty paying back money when you cannot even remember what you used it for, particularly if it is a lot. If you cannot remember the fun that you had spending it or even find anything that you think you used the money for, it can feel even worse.
So when you are considering getting a credit card, store card, overdraft or any other sort of open ended loan; it is worth thinking hard about your decision. You should make sure that you think hard about what you are using it for and whether it is something that you think is worthwhile. Consider how much extra it will cost using this way of borrowing and have a repayment plan. Look at other borrowing options and weigh up the pros and cons and then you will be able to make a well thought out decision about the loan and know that you are justified in taking it out.