In February 2023, Max Crowdfund published a Full Bullet Loan, which is the first of this kind on the platform. The following article describes in detail what a full bullet loan is and how it compares to other loan types.
Bullet Loan vs. Full Bullet Loan
In the finance sector, a bullet loan is generally understood to be “a loan where a payment of the entire principal of the loan, and sometimes the principal and interest, is due at the end of the loan term” (Wikipedia). This type of loan can further be broken into bullet loans and full bullet loans.
A full bullet loan is a type of loan in which the borrower makes no payments, or interest only payments, during the term of the loan, and then repays the full principal balance in a single lump sum payment at the end of the loan term. This is the general definition accepted within the finance sector. In the case of Max Crowdfund property loans, the definition is more specific.
For projects on the Max Crowdfund platform specifically, a full bullet loan is a loan in which the interest is paid at the end of the loan term at the time of the loan redemption, whilst a bullet loan has monthly interest payments. This is an important distinction because investors in this type of loan will not receive monthly payments during the loan period but will receive a large “lump sum” at the end of the loan.
This type of loan is often used in real estate projects where the borrower expects to generate sufficient income to repay the loan at the end of the term. The lump sum payment is generated from the proceeds of the sale of the property or project, or from the refinancing of the project.
Disadvantages of a Full Bullet Loan
Full bullet loans can be risky for both the borrower and the lender. The borrower’s risk is that they will not be able to repay the loan at the end of the term, while the lender takes the risk that the property or project will not generate enough income to make the repayment. As a result, borrowers may offer higher interest rates for full bullet loans to compensate for the increased risk.
Advantages for Borrowers
The advantage of a full bullet loan is that it allows borrowers to reduce monthly overheads during the loan term, since they do not have to make repayments during this time. This can be beneficial for borrowers who need to keep their cash flow flexible during the loan term, particularly for real estate projects where costs and therefore cash flow can be variable.
By eliminating re-payments during the loan term, borrowers can use their available cash flow to concentrate on the development of the project, which in turn may result in a quicker completion date.
Full bullet loans are a good fit for real estate projects where developers expect to make a sizeable profit at the completion of the project but may not have enough current income to make full principal and interest payments.
Advantages for Lenders
A full Bullet loan can offer several advantages for the lender. Most notably, these types of loans generally offer a higher interest rate. Since the borrower does not have to make payments during the loan term, the lender can earn higher interest income compared to a loan with regular amortisation.
Full bullet loans can also lower credit risk for the lender. Since the borrower is only required to pay the entire principal amount at the end of the loan term, the lender has a higher degree of certainty that the principal will be repaid in full. Similarly, the borrower is allowed to concentrate on the property development task without the pressure of meeting monthly payments and is therefore more likely to deliver a better project in less time.
Finally, a full bullet loan is easier to manage for the lender; there is a start date and an end date and nothing in between, so lenders do not need to worry about reinvesting their monthly repayments or managing their accumulation in any way.
We will be posting a video with our CFO & CRCO, Jeroen van Eikenhorst, talking about full bullet loans. Please keep an eye on social media and newsletters for details.
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