A bullet loan may sound a bit violent, but don’t worry, there’s no need to call emergency services (unless you count your stock broker as an emergency contact). A bullet loan is a type of loan in which the borrower makes relatively small payments, consisting only of interest, during the term of the loan and then makes a large payment of the remaining principal when the loan matures. This final lump-sum payment is known as the “bullet.” This is very similar to a balloon payment loan, except that a balloon payment loan usually involves payments that partially amortize the loan (ie, these payments pay down both the principal and interest to some extent) while a bullet loan’s payments usually are interest-only, with the entire principal balance being due on the last day of the loan’s term.
In real estate, bullet loans are sometimes used for commercial properties, investment properties, construction projects, or other situations where the borrower expects to sell the property, refinance the debt, or receive sufficient funds before the loan matures. The arrangement can provide lower payments during the loan term, but it also creates additional risk because the borrower must be prepared to make a substantial payment at maturity. If the borrower cannot repay or refinance the outstanding balance when it becomes due, the borrower may face default and potentially foreclosure on the property securing the loan.
