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. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  2. Call Loan

    A loan provided to a brokerage firm and used to finance margin ...
  3. Deferment Period

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

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

    A type of loan in which payments on the principal are not made, ...
  6. Cash Basis Loan

    A loan where interest is recorded as earned when payment is collected. ...
Related Articles
  1. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing.
  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. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  5. 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.
  6. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  7. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  8. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
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. Federal student loan rates: who sets them, why they vary

    Federal student loan rates are set by Congress, not by banks. Learn more about who gets what rate, and how often they get ... Read Answer >>
Trading Center