A loan for a motorcycle is an example of: Multiple choice question. open-end credit closed-end credit vehicle credit
The correct answer and explanation is:
Correct Answer: Closed-end credit
Explanation (300 words):
A loan for a motorcycle is best classified as closed-end credit, also known as installment credit. Closed-end credit refers to a type of loan that is issued for a specific amount and must be repaid, along with interest, over a predetermined period. Common examples include auto loans, mortgages, student loans, and, as in this case, motorcycle loans.
When a borrower takes out a motorcycle loan, they receive a lump sum of money from a lender, which is used to purchase the vehicle. The borrower agrees to repay the loan in regular, fixed installments—typically monthly—until the full loan amount, plus any interest, is paid off. Once the loan is fully repaid, the credit account is closed. The borrower cannot reuse the funds or borrow more money on that same loan without applying for a new one.
This is different from open-end credit, such as credit cards or lines of credit, which allow the borrower to use funds up to a certain limit, repay them, and then borrow again repeatedly without reapplying. Open-end credit is revolving, while closed-end credit is non-revolving.
Although the motorcycle loan is a type of vehicle credit, that is a general category rather than a type of credit. “Vehicle credit” could refer to either open- or closed-end credit depending on how it’s structured. In this case, since it is a fixed loan to purchase a specific motorcycle with scheduled payments, it falls clearly under closed-end credit.
Understanding the nature of the credit type is important because it affects repayment, interest rates, and how the loan impacts your credit score. Closed-end credit can help build a credit history if managed well, but missed payments can hurt your credit standing.