Bullet Loans: Risks, Benefits & How They Work

A bullet loan requires the entire payment of the principal at the end of the loan term, instead of in regular installments. These loans, also called balloon loans, are considered highly risky and even predatory, in some cases.

No Principal Payments

During the life of the loan, the borrower is making payments to pay the interest only. These are not "interest only" loans, however. The structure allows for the entire interest that will be charged on the debt to be applied to the front-end. The borrower has to pay off this sum in its entirety prior to having payments applied to principal. 

Example

For example, on a $500 personal loan with a 12 percent rate simple interest rate, the borrower will owe $60. With a standard loan, this $60 interest payment will be spread out over installments. For example, a $46 payment each month will add about $5.50 to paying down the interest and $40.50 to paying down the principal. With a bullet loan, the first payment will go 100 percent toward interest. The borrower will gain no equity with the payment, and equity will only begin to accumulate after the second payment.