Bullet Loan

How Bullet Loans Work (“Balloon Payment”)

Loans structured with bullet repayments, also known as “balloon” loans, are when the repayment of the original principal is fully made at the end of the lending term.

Throughout the borrowing period, the only loan-related payment is the interest expense, with no required principal amortization.

Then, on the date of maturity, the one-time large payment obligation coming due is the so-called “bullet” repayment.

In effect, a bullet loan comes with lower payments in earlier years until the date the principal repayments come due, but the company has time (and additional capital) in the meantime.

Learn More → What is a Balloon Payment? (CFPB)

Bullet Loans vs. Amortizing Loans

To the borrower of the bullet loan, the flexibility afforded is a major benefit – i.e. no (or very minimal) principal amortization until the loan matures.

By obtaining a bullet loan, the amount of financial obligations is reduced in the near term, although the debt burden is actually just being pushed back to a later date.

Rather than the gradual repayment of the loan principal over the borrowing term, as seen in amortizing loans, one lump sum repayment of the loan principal is made on the date of the maturity.

“Full” Lump Sum Bullet Loan

Considering how customizable bullet loans tend to be, the interest can be negotiated to be in the form of paid-in-kind (PIK) interest, which further increases principal due at maturity (and the credit risks) as the interest accrues to the ending balance.

If structured as PIK interest, the principal is equal to the original debt capital provided plus the accrued interest, with the interest expense growing each year from the increased debt balance.