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In banking and finance, a bullet loan is a loan where a payment of the entire
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principal
of the loan, and sometimes the principal and interest, is due at the end of the loan term. Likewise for bullet bond. A bullet loan can be a mortgage, bond, note or any other type of
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. In bullet loan one can choose to pay only the interest amount and bulk amount can be paid later at the time of the maturity of loan or as agreed by the financial institution. This arrangement is convenient to individuals who are expecting a huge cash flow in the form of bonuses or fixed returns in some months. It lowers the borrower's monthly financial burden. It is also sometimes known as
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Free Loan. The payment that is due at the end of the loan is referred to as the bullet payment or balloon payment. Bullet loans are common, and usually referred to by other names; bullet loan is a generic and unofficial term. Many types of publicly traded bonds and notes constitute bullet loans: the face value of the bond is payable at bond maturity, and only interest payments are due during the interim periods. Short-term bonds or notes which pay no interest are also a form of bullet loan. Bullet loans should be contrasted with
amortizing loan In banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital mark ...
s, where the amount of principal is paid down over the life of the loan. There is no requirement that a loan be either a bullet loan or an amortizing loan; combinations of all sorts exist. For example, a loan may have a
grace period A grace period is a period immediately after the deadline for an obligation during which a late fee, or other action that would have been taken as a result of failing to meet the deadline, is waived provided that the obligation is satisfied during ...
during which no principal is paid; partial amortization during the remainder of the loan; and a bullet payment at the end of the loan that is some percentage of the original principal. In China, certain types of bullet loans have been prohibited by the
China Banking Regulatory Commission The China Banking Regulatory Commission (CBRC) was an agency of the People's Republic of China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the List of countries and dependencies by population, wo ...
due to concerns regarding Chinese banks' risk management capabilities.KPMG Mainland China Banking Survey 2011 This extends only to lending to retail, commercial, and government clients, while not including the issuance of bonds or notes.


See also

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Balloon payment mortgage A balloon payment mortgage is a mortgage which does not fully amortize Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal and interest Interest, in finance and economics ...


References

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