What is a 'Bullet Repayment'

A bullet repayment is a lump sum payment for the entirety of a loan amount paid at maturity. Loans with bullet repayments are also referred to as balloon loans, and are commonly used in mortgage and business loans to reduce monthly payments. The existence of a bullet repayment due at a loan’s maturity often necessitates advanced planning to have a refinancing facility in place, unless the borrowers have cash to pay off the lump sum.

BREAKING DOWN 'Bullet Repayment'

Bullet repayments are most often a component of balloon loans, which are not amortized over the duration of the loan. The deferral of principal payments until the loan matures results in lower monthly payments during the life of the loan, but presents a significant risk to borrowers who are not prepared to make the lump sum payment or make other arrangements. Bullet repayments have also been integrated with fixed-income based exchange-traded-funds (ETFs), giving them a bond-like predictability for investors.

Bullet Repayment Versus Amortization

The difference between interest-only payments on a loan with a bullet repayment and amortizing mortgage payments can be significant. For example, on a 15-year interest-only mortgage of $320,000 with a 3% interest rate, the yearly interest is $9,600 and monthly payments are $800. The same loan with amortization has a monthly payment of $2,210.

The monthly payment schedule clearly favors the interest-only loan. However, the amortized loan is fully paid at maturity due to the higher payments, while the interest-only borrower faces a bullet repayment of $320,000. As a bullet repayment date approaches, borrowers have two primary options if money is not available to pay the loan in full. The property may be sold, with the proceeds used to pay the loan principal, or refinancing may be arranged to take out a new loan to cover the bullet repayment. Under certain circumstances, balloon lenders offer borrowers the option to convert loans to traditional amortizing loans, instead of being faced with a huge one-time payment.

Bullet Repayments and ETFs

In ETFs with bullet repayment dates, the investors assume the role of lenders, while the funds act as the borrowers. Funds with bullet repayments are usually composed of bonds, notes and fixed-income vehicles with maturities preceding the bullet repayment date. Investors receive regular interest payments on their shares during the term of the fund, and are repaid the principal from the matured portfolio holdings on the bullet repayment date. The key benefit of the bullet repayment for investors is the predictability of the return of principal on a specified date, much like the maturity of a bond.

  1. Bullet GIC

    A type of guaranteed investment contract where a single payment ...
  2. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  3. Repayment

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

    A type of loan where payments are made of interest only. Repayment ...
  5. End Loan

    A permanent, long-term loan used to pay off a short-term construction ...
  6. Fully Amortizing Payment

    A periodic loan payment, part of which is principal and part ...
Related Articles
  1. Personal Finance

    Creative Ways To Overcome Student Debt

    There's many available student debt repayment options and strategies, such as student loan initiatives and loan consolidation plans.
  2. Personal Finance

    Student Loan Debt: Is Consolidation The Answer?

    Consolidating your student loans offers convenience, but there are drawbacks.
  3. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  4. Personal Finance

    How to Get Your Student Loans Forgiven

    The prospect of debt forgiveness may seem like a dream come true. In reality, though, not that many people end up being eligible.
  5. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  6. 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.
  7. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  8. Financial Advisor

    Deal with Your College Debt Using These Steps

    The worst thing to do with college debt is to ignore it. The best way to start tackling it is with a clear roadmap to financial freedom.
  9. Financial Advisor

    Student Loan Debt: What Every Borrower Should Know

    If you must take on student debt, you should know the different types of loans and federal programs available well before graduating.
  1. What are the typical repayment terms for a syndicated loan?

    Learn more about syndicated loans and how they are structured, specifically including the typical repayment terms for a syndicated ... Read Answer >>
  2. What are the pros and cons of consolidating my student loans?

    Read about the possible advantages and disadvantages of consolidating your student loan debts, and find out how to determine ... Read Answer >>
  3. How does accrued interest work on student loans?

    Learn how student loan borrowers are affected by accrued interest on outstanding loans balances while in deferment and during ... Read Answer >>
Trading Center