What is an Open Loan?


Posted on Wednesday 05 August 2020


Secured, unsecured, fixed rate, variable rate, closed, open—there are tons of different kinds of loans out there. Choosing the right loan for you means first understanding what the requirements for these loans are, and then applying those requirements to your unique financial situation. Not every loan is going to be a perfect match for your needs!

But the differences between types of loans aren’t always clear. Unless you have a magnifying glass to read through every bit of small print (we certainly don’t), you might end up missing a key component of your loan.

If you’re looking for a loan but aren’t sure whether you want a closed or an open loan, this article was written with you in mind! Keep reading—we’ll tell you everything you need to know about open loans to help you make smart decisions with your personal finances.

Open Loan Definition

An open loan is simple, straightforward, and extremely common. You probably have one or two open loans right now, without even realizing it. An open-end loan is a loan that does not have a payoff date. So what does that actually look like? Take a look in your wallet to see if you have any credit cards.

If you have a credit card, you have an open loan. With some small exceptions for credit rebuilding cards, all credit cards are open loans. Sure, you have monthly due dates to pay off increments of your line of credit as you use it—but there is no hard-and-fast requirement to have the entirety of your credit card paid off by a specific date.

The same definition also applies to lines of credit, such as when you take out a loan against your home equity. The key difference here is that a home equity line of credit is an open-end secured loan, meaning you are backing your ability to pay off the loan with an asset—in this case, the asset is your house. Generally speaking, however, if it’s a loan that you aren’t required to pay off by a certain date (i.e., a loan that automatically renews itself as it is paid), it’s an open-end loan.

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Advantages and Disadvantages of Open Loans

Every financial product has its own unique advantages and drawbacks. Open loans are very common and tend to be more flexible, but there are plenty of other factors to consider before you sign on that dotted line. See below for an overview of some key pros and cons that come with open loans.

Open Loans: The Positive

  • Flexibility
    Open loans are often recurring loans; once you’ve paid off your credit card in full, your line of credit is renewed and you can continue to use it for indefinitely (at least as long as you continue making payments).
  • Credit scores
    Open loans via credit cards have a huge impact on your credit score. In fact, you’ll have a hard time getting a healthy credit score without at least one or two credit cards (of course, the caveat is that you’ll need to use and pay those credit cards wisely). Having a few open loans can pay off in a big way when it comes to boosting your credit score, enabling larger purchases down the line.
  • Purchasing power
    Unlike student loans, auto loans, or mortgages, open loans make it easy to send money where you need it the most. Credit cards can be applied to utilities, rent, groceries, travel and more, with very few restrictions. The ability to have that purchasing power in an emergency is a big advantage to credit cards, giving a cushion to fall back on if your income changes or when disaster strikes.

Open Loans: The Negative

  • High interest rates
    Open loans tend to come with high interest rates, often between 15–25 percent. If you’re not careful, you could easily wind up paying much more than what you actually borrow (or, in this case, what you are spending) over the life of the loan.
  • Credit requirements
    While credit cards do have a ton of flexibility to them, you may find that you’re restricted based on your credit score. If you’re working on rebuilding your credit, you may not qualify for the credit card you want—and more importantly, the credit card that you get may also come with an annual fee, decreasing its affordability over time.
  • Temptation to spend
    Credit cards can be used nearly anywhere, which is certainly a big advantage—but when used incorrectly, this type of flexibility can quickly turn into a disadvantage. In fact, this is likely a big reason why so many Canadians wind up with an average of $8,600 in credit card debt. Let’s face it: it’s tempting to spend more often when the money isn’t coming directly out of your bank account.

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Smart Financial Tips for Open Loans

Whether you have a few open loans already or are in the process of looking for the best fit for your financial needs, use the tips below as a guide toward smart financial management.

  • Pay more than the minimum.
    Open loans are set up as long-term, recurring lines of credit. That’s great if you want to have a renewable borrowing source, but not so great if you aren’t keeping up with payments. Higher interest rates on credit cards means that you need to pay more than the minimum in order for your payments to make a difference. Pay as much as you can to avoid getting extra fees tacked on each month and to keep your line of credit affordable over the long term.
  • Pay on time, every month.
    Because credit cards have a direct impact on your credit score, you’ll want to ensure that you establish a solid history of on-time, regular payments. If you have trouble remembering your due date, set up an automatic withdrawal from your checking account. Trust us: your credit score will thank you.
  • Read the fine print.
    Credit cards can come with a host of additional fees, which could make a big difference in the type of credit card you sign up for. Make sure you understand what you’ll be charged for ATM withdrawals, foreign transactions, and balance transfers.
  • Research the best features.
    It’s tempting to sign up for the first credit card offer you get for an influx of cash, but don’t make a hasty decision. Open loans through credit cards come with a ton of features and add-ons, such as the ability to earn cash back, points toward hotel stays and flights, and discounts on specific spending categories. Take the time to do a little research in order to find the card that is best customized to your spending habits and needs.

If you are having trouble getting approved for the credit card that you want—or if you don’t want to get locked into a recurring open loan just yet—you may want to try a short-term loan with My Canada Payday. Our loans help you build your credit score by establishing positive lending history and are designed to last from one paycheque to the next. Learn more about why My Canada Payday is one of the best payday lenders across the country by calling (604-630-4783) or emailing (getpaid@mycanadapayday.com) our industry-leading support team!