DEFINITION of 'Bow Tie Loan'

A short-term, variable-rate loan in which unpaid interest charges above a predetermined interest rate are deferred. A variable-rate loan is a loan in which the interest rate fluctuates in response to market interest rates. So, when bow tie loans are issued, a predetermined interest rate is set and whenever the market rate goes up past that rate, interest payments for investors are deferred until the end of the loan's maturity.

BREAKING DOWN 'Bow Tie Loan'

For example, let's say a company wants to take out a bow tie loan of $100,000, current interest rates are 15% and the lending company has set a limit interest rate of 22%. At 22%, the company is paying $22,000 in interest payments. In the event that interest rates rise above 22% to, say, 26%, the interest payments will rise from $22,000 to $26,000. In this case, the company is still liable for $22,000 of interest payments, but the difference of $4,000 ($26,000 - $22,000) is deferred until the loan's maturity date.

RELATED TERMS
  1. Call Loan

    A loan provided to a brokerage firm and used to finance margin ...
  2. Loan

    The act of giving money, property or other material goods to ...
  3. Deferred Interest

    The amount of interest that is added to the principal balance ...
  4. Deferment Period

    1. A time during which a borrower does not have to pay interest ...
  5. Cumulative Interest

    The sum of all interest payments made on a loan over a certain ...
  6. Non-Amortizing Loan

    A type of loan in which payments on the principal are not made, ...
Related Articles
  1. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  2. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  3. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  4. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  5. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  6. Personal Finance

    An Introduction to Federal Direct Loans

    Federal Direct Loans provide student funding that a majority of people can easily access. Find out if you qualify.
  7. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  8. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. When capitalizing interest, will interest accrue while you are in a deferment?

    Learn what capitalized interest is. Understand why interest accrues while a person is in a deferment, based on capitalized ... Read Answer >>
  3. What's the difference between a grace period and a deferment?

    Learn the difference between grace periods and deferments and when each type of delayed-payment period applies to various ... Read Answer >>
  4. Can Direct Consolidation Loans be deferred?

    Student loans bundled into direct consolidation loans may be deferred under certain circumstances. Read Answer >>
Trading Center