A bullet loan is a loan modality through which the payment schedule establishes a periodic return of interest and a final payment with the principal of the capital.
By contracting a bullet loan, it is possible to agree to return the amount received in a specific way: successive installments will concentrate the interest generated, while the principal will be fully returned in the last installment.
Another common denomination for this category of loans is that of “balloon”, balloon in Anglo-Saxon.
It usually establishes successive payments, normally month after month, with a payment due date in which the refund of the amount received at source must be paid.
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Formally, your payment schedule is calculated according to the amortization methodology or American method (also bullet or bullet system).
Characteristic features of a bullet loan
Compared to other existing alternatives in the economic day-to-day, a bullet-type loan stands out for complying with the following points:
- Significant final fee. As explained above, the main disbursement is made last at the time of maturity.
- Financing tool. Given its nature, this mechanism is often used to undertake investments or entrepreneurship projects.
- Adaptability. The conditions when contracting this loan vary depending on the lending entity and the needs of the borrower. In this sense, this mechanism is understood as a financial solution for individuals and companies of all kinds.
- Defined term. It is fixed between one and eight years, although this category usually concentrates loans with short duration. Precisely, the short term helps to avoid the creation of disproportionate interests and the reduction of non-payment or repayment risks.
- Periodicity. Although the most common practice is a monthly amortization or payment method, there are occasions in which quarterly or annual calendars are established (in fewer occasions this last mode)
Taking the above points into account, this modality usually stands out for entailing lower financial costs.
In this sense, it is an attractive tool for figures such as self-employed workers or SMEs that need an affordable economic boost given their characteristics.
With the capital received at the beginning, they have the possibility of addressing the expenses required to start with the economic activity.
It will be in the future, and once they obtain the estimated profitability, when they address the payment commitment acquired with their lender.