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Bullet Loan

Category — Loans
By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated April 18, 2023

What is a Bullet Loan?

A bullet loan is a loan that has a large payment, often known as a "bullet payment", at the end of the term. This payment is typically much larger than regular payments, and it is designed to pay off the full loan balance in one lump sum. Bullet loans are often used for short-term financing needs, and they are popular among business owners and investors.

Bullet loan allows borrowers to make smaller regular payments during the term of the loan. This can be helpful for those who have limited cash flow in the short-term but expect a larger payout at some point in the future. For example, a business owner may use a bullet loan to finance a project or investment but expect a large revenue stream or capital injection at the end of the term that can be used to pay off the loan.

Overall, a bullet loan is a type of loan that has a one lump sum repayment at the end of the term. It can be helpful for those who need short-term financing and expect a large payout in the future. Bullet loans typically have lower interest rates than traditional loans, but it’s important to carefully consider the terms and risks before applying for one.

Bullet Loan

How a bullet loan works

Bullet loan requires the borrower to pay interest only for a period of time and then make a single, lump-sum payment of the principal at the end of the loan term. This is in contrast to a traditional loan, where the borrower makes regular payments of both principal and interest over the life of the loan.

Bullet loans are commonly used in commercial real estate financing, as well as for large-scale projects such as infrastructure development. The idea behind a bullet loan is that the borrower can defer repayment of the principal until the end of the loan term, freeing up cash flow to finance ongoing operations or other projects.

The interest rate on a bullet loan is typically higher than that of a traditional loan, as the lender takes on more risk by deferring repayment of the principal. In addition, bullet loans are typically short-term, ranging from one to ten years. Additionally, a bullet loan sometimes requires collateral such as real estate or other assets.

Bullet loan can help a borrower manage cash flow more effectively. By only paying interest on the loan for a period of time, the borrower can allocate funds towards other expenses or investments while still having access to the capital they need. Additionally, a bullet loan can be useful for borrowers who expect to receive a large payment or windfall in the future that can be used to repay the principal.

However, bullet loans also come with significant risks. If the borrower is unable to repay the principal by the end of the loan term, they may face foreclosure or other legal action by the lender. Additionally, because the interest rate on a bullet loan is typically higher, the total cost of borrowing may be more expensive than with a traditional loan.

Pros and cons of a bullet loan

A bullet loan can have a variety of pros and cons, depending on the borrower’s needs and objectives.

Pros of a bullet loan

  1. Lower monthly payments. One benefit of a bullet loan is that it allows you to make much lower monthly payments throughout the loan term. This can be helpful for borrowers who are struggling to make ends meet and need to keep monthly expenses low.

  2. More flexibility. The loan can be structured to provide more flexibility to the borrower. For instance, you may be able to choose a longer loan term with lower monthly payments or a shorter loan term with higher monthly payments.

  3. Cost-effective. A bullet loan may also be cost-effective for borrowers who expect their future earnings to increase or have access to additional funds. This is because the borrower can take advantage of low-interest rates and lower monthly payments while paying off the loan with the balloon payment.

Cons of a bullet loan

  1. Risk of default. The biggest risk of a bullet loan is that a borrower may fail to make the balloon payment at the end of the loan life. This can lead to defaulting on the loan and potentially losing any collateral that was used to secure the loan.

  2. Increased interest rates. Bullet loans typically carry higher interest rates than traditional loans. This can result in the borrower paying more interest over the life of the loan than they would with a traditional loan.

  3. Limited options. Bullet loans may not be available from all lenders, and the terms and conditions may vary from one lender to another. This can limit the borrower’s options and make it harder to find the right loan for their needs.

A bullet loan vs. an amortized loan

A bullet loan and an amortized loan are two types of loans that differ in terms of repayment structures. Both are commonly used for business loans, but the repayment structure follows different schedules.

Bullet loans

A bullet loan is a loan in which the borrower holds the full amount of the loan until the end of the loan term. Loan repayment consists of a single lump sum payment at the end of the life of the loan. This type of loan is usually used to finance large business expenses, such as building construction, plant equipment, or business expansion.

One of the significant advantages of a bullet loan for borrowers is that they can repay the loan in full without any installment payments for the life of the loan. However, it carries a considerable amount of risk, as the borrower may not have enough cash flow to pay the entire loan at the end of the loan term.

Amortized loans

An amortized loan, on the other hand, involves a repayment schedule that is divided into equal installments over the life of the loan. It includes the interest rate and the principal amount of the loan that are evenly spread out over the loan term. These loans can last for several years or even decades, depending on the loan amount, and are more common than bullet loans.

For borrowers, the main advantage of an amortization loan is that it makes repayment more manageable, as the installments for interest and principal are spread out over the loan term. Additionally, amortized loans carry less risk as payments are spread out rather than bundled into a single balloon payment.

Overall, while bullet loans are characterized by their single lump sum repayment at the end of the loan term, an amortization loan allows the borrower to make regular installment payments throughout the life of the loan. There are advantages and disadvantages associated with these types of loans, and borrowers should consider their needs and cash flow ability carefully. Borrowers should consult with a professional financial advisor to help determine the best type of loan for their business needs.

How to calculate a bullet loan

To calculate a bullet loan in the USA, you need to follow these steps:

  1. Determine the principal amount. The principal amount is the entire amount that the borrower will receive and repay at the end of the loan term.

  2. Determine the maturity date. The maturity date is the date on which the principal amount is due. It is typically specified in the loan agreement.

  3. Determine the interest rate. The interest rate is the sum charged by the lender for the use of money. It can be fixed or variable and is expressed as an annual percentage rate (APR).

  4. Calculate the interest payments. To calculate the interest payments, you need to multiply the principal amount by the interest rate and then multiply that amount by the number of years or months in the loan term.

  5. Calculate the balloon payment. The balloon payment is the final payment due at the end of the loan term. It is the sum of the principal amount and the interest payments.

For example, let’s say you are borrowing $1,000,000 at an interest rate of 5% for a 5-year term. The interest payments would be calculated as follows:

Interest payments = Principal amount x Interest rate x Loan term = $1,000,000 x 0.05 x 5 = $250,000

The balloon payment would be calculated as follows:

Balloon payment = Principal amount + Interest payments = $1,000,000 + $250,000 = $1,250,000

Calculating a bullet loan in the USA involves determining the principal amount, maturity date, and interest rate and then calculating the interest payments and balloon payments. 

A bullet loan qualification requirements

Qualification for a bullet loan varies depending on the lender and specific loan terms. However, certain criteria are typically considered during the application process:

  1. Creditworthiness. Borrowers will need to demonstrate their ability to repay the loan, usually by providing proof of income and credit history. The lender may also consider credit score, debt-to-income ratio, and other financial factors.

  2. Collateral. Bullet loans are often secured by collateral, such as property or other assets. The value and quality of the collateral will be evaluated by the lender to determine the loan amount and interest rate.

  3. Loan purpose. Lenders may have specific requirements for how the loan proceeds are to be used. For example, a bullet loan for commercial real estate may require the property to be used for a certain type of business.

  4. Loan terms. Bullet loans can have varying repayment terms, such as a 5-year, 10-year, or 20-year term. The lender will determine the term based on the borrower’s qualifications and the nature of the loan.

Borrowers who are seeking for a bullet loan should have a plan for how they will make the large final payment at the end of the loan term. They should also be prepared to provide detailed financial information and collateral to secure the loan. 


  • What is a bullet-type loan?

  • What is a bullet loan vs. a balloon loan?

  • What is a bullet repayment loan example?

  • What is the opposite of bullet payment?

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