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What is a Bullet Loan?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 01 December 2016
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A bullet loan is a type of loan in which the principal that is borrowed is paid back at the end of the loan term. In some cases, the interest is added to the principal and it is all paid back at the end of the loan. This type of loan provides flexibility to the borrower but it is also risky.

This type of loan is sometimes known as a balloon loan or an interest-only loan. All of these terms essentially mean that a borrower is going to be saving a large payment until the end of the repayment term. With a bullet loan, borrowers can get access to loans they would not be able to afford otherwise.

One of the primary advantages of this type of loan is that it provides flexibility to the borrower. When an individual is trying to shop for a loan, he or she might find that the loan payments are too high to afford. By getting a bullet loan, the individual can significantly reduce the amount of money that will be due on each payment. In many cases, the borrower is only going to have to pay for the interest that is accruing during each period.

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A bullet loan will sometimes also include the interest that is accruing in the amount that is due at the end of the loan. When this happens, the borrower is not going to have to make any payments until the end of the loan. This type of loan is less common, but it can be used in some circumstances.

Even though this type of loan can be beneficial, it is also extremely risky. Many borrowers have faced issues with this type of loan after getting involved with one. One of the biggest problems is that many borrowers do not make the proper arrangements to make the balloon payment at the end of the loan term. The balloon payment comes due and the borrower does not have the money to repay it. In that case, the lender will foreclose on the property that is securing the loan.

This type of loan is also refinanced quite frequently. Borrowers often use the loan to get quick access to the money they need. They then take advantage of the small monthly payments associated with the bullet loan. When the balloon payment comes due, they will refinance into another loan.

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Vincenzo
Post 3

@Logicfest -- Good point, and many a person has noticed that "good friend" loan officer who said the last payment on a bullet loan could be refinanced is nowhere to be found when the bank calls the entire loan due.

Be careful of those bullet loans. Never get one unless you know you can handle that final payment. Otherwise, you may find yourself having to come up with $100,000 (or whatever) or get dragged into court.

Logicfest
Post 2

@Melonlity -- Unless you can get that promise in writing, I would avoid that bullet loan unless you are certain you will have the means to pay off that loan. The loan officer can say that the final payment will be refinanced, but you will have no way to enforce that promise unless it is written down.

And, believe me, you will not get that written down.

Melonlity
Post 1

The bullet loan (or balloon payment loan) does not have to be risky. That final payment can often be refinanced and your banker will let you know if that is a possibility up front. If your banker assures you you can refinance that final payment, then you should be able to take out that bullet loan with no problem.

So, relax. If you can refinance that final payment, there's not that much risk, is there?

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