Bow Tie Loan

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. Repayment

    The act of paying back money previously borrowed from a lender. ...
  2. Loan

    The act of giving money, property or other material goods to ...
  3. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  4. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
Related Articles
  1. Retirement

    The Best Way To Borrow

    There are many avenues from which to drum up funding. Find out the pros and cons of each.
  2. Options & Futures

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  3. Credit & Loans

    What is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  4. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  5. Economics

    How Will Rate Hikes Impact The Banking Sector?

    Banks traditionally rally in a rising rate environment but it may be different this time around.
  6. Credit & Loans

    4 Personal Loans Sources for Fair Credit

    Discover the best places to apply for an unsecured personal loan if you have only fair credit, including information on rates and fees.
  7. Credit & Loans

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  8. Entrepreneurship

    Follow These Rules When Borrowing Money for Your Business

    Learn the new rules to follow when borrowing money for your business. Understanding the do's and don'ts can make all the difference when it comes to getting a loan.
  9. Credit & Loans

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  10. Credit & Loans

    Best 3 Online Auto Loan Calculators that Include Tax

    Learn where you can find the best auto loan calculators online that include sales tax, and understand the different features these calculators offer.
RELATED FAQS
  1. When is it a good idea to take out a loan to invest?

    The only time it makes sense to invest a loan is when the return on investment of the loan is high and the risk level of ... Read Full Answer >>
  2. 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 Full Answer >>
  3. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  4. Are personal loans considered income?

    Personal loans are not considered income for the borrower unless the loan is forgiven. In other words, you cannot be taxed ... Read Full Answer >>
  5. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  6. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center