This week’s term of the week is Bullet loan. You could come across this term when you want to calculate a loan using the Loan Calculator on our website. What does this type of a loan entail exactly? In this article, we will explain it to you.
A bullet loan is a type of loan where the borrower for the entire duration of the loan is only obligated to pay the corresponding interest, which means that the borrowed capital needs to be redeemed, in its entirety, at the end of the duration. The difference with other types of loans thus, is that with those other loans, it is customary that simultaneously with paying interest a part of the borrowed capital should be redeemed as well. As a result, the monthly fees of the borrower getting a bullet loan are relatively low. Though it is very important that the borrower possesses the required capital to redeem the entire amount of the loan. Hence why a bullet loan is particularly requested by people who expect to acquire more money by the end of the loan’s duration.
Bullet loan in practice
Within the real estate industry, bullet loans are growing in popularity, due to benefits such as being able to choose whether to pay interest either monthly or yearly. This allows for increased flexibility for the money borrowers for the duration of the loan. Moreover, this type of loan is an option for people who in the beginning do not yet possess the amount of money that needs to be redeemed at the end of the loan. Because of this, the borrower is free to acquire the required capital in their desired way, for instance by renovating properties and selling them for profit. Some disadvantages of a bullet loan, however, are that a risk factor is involved due to the heavy payment at the end. Whenever the obligatory capital payment cannot be met, a situation could occur in which the borrower needs refinancing to even be able to pay back the initial loan. To compensate for this risk, the corresponding interest rate of a bullet loan is often higher than with other types of loans. This makes investing in projects that make use of a bullet loan additionally intriguing.
