Bullet Repayment can be considered a sum of payment for the entirety of any outstanding loan amount during its maturity period. In many cases, this payment can be a single payment of principal on a bond.

This loan term is commonly used in the real estate and banking sector and sometimes they're called balloon loans

A lot of businesses and mortgage companies encourage the use of this loan in other to reduce the monthly repayment of a loan during the loan term. 

In this article, we're going to cover everything you need to know about bullet repayment. Keep reading to know more about bullet or balloon loans as I reveal everything about this type of loan.

I will try to simplify everything in layman's language. You don't need to have a degree in personal finance to understand this loan and how it works. Without wasting much time let's dive into the topic. But before I do that, there are some key things I'll want you to note down and have at the back of your mind regarding bullet repayment.

What Is Bullet Repayment?

As I have mentioned before, the bullet repayment is a lump sum of payment you make for the entirety of an outstanding loan. 

When a bullet repayment gets due at loan maturity, it usually necessitates advance planning to have a refinancing facility in place, unless as a borrower, you have some money or cash to pay off that huge lump sum.

Also Read: How To Unlock $100 to $35,000 quick loan Using MOGO Loans


Understanding Bullet Repayment? (Bullet repayment Explained)


How Does Bullet Repayment Work?

In many cases, bullet repayments which are sometimes considered balloon loans are usually not amortized over a particular duration of the loan. What this means is that the final payment is usually the principal payment made. Still, the balance will occasionally be amortized through other smaller, incremental payments before the balloon payment comes due. For the loan to be retired, the final payment must be larger than the others.

On the other hand, the deferral of the principal repayment of the loan maturity will result in low monthly payments during the life of the loan because the payment represents only interest.

This poses a significant risk to the person who borrowed the money and is not ready for the repayment of the large lump sum payment. If you know you don't have any means or arrangement to deal with the bullet repayment, don't get involved.

In today's financial industry, bullet repayment has been integrated with fixed-income-based exchange-traded funds (ETFs), giving them bond-like predictability for investors.

Understanding Bullet Repayment and Amortization

In the process of trying to explain bullet repayment or balloon loan, you'll realise that I made mentioned amortization on so many occasions. For you to get a clearer view of bullet repayment, you need to have a better understanding of amortization and bullet repayment.

Amortization can be regarded as a type of loan which requires the borrower to make periodic payment which is applied to both the interest and the principal.

In many cases, the borrower is expected to pay off the interest expense for the period, and any amount that is left will then be put towards the reduction of the principal amount.

When you look at bullet repayment and amortization, you'll get to realize that the difference between the interest-only payment on the loan with bullet repayment and amortization is quite significant.

Example Explaining ETF Bullet Repayment


When it comes to ETF Bullet repayment, the investor assume the role of a lender in ETFs with bullet repayment dates, this mean that the funds will simply act as the borrower. In many cases as usual, the funds with bullet repayment are made of bonds , notes, and even fixed-income vehicle with a maturity preceding the actual bullet repayment date. Hope you're getting the point. Investors are expected to receive their regular interest payments on their shares during the term of the fund, which means that they're paid the principal from their matured portfolio holding on the bullet repayment date.

Investors also get to benefit from bullet repayment base on the predictability of the return of principal on a specified date, much like a maturity of a bond.

As a borrower, you basically have two major options when it comes to repaying back your loan. If for any reason there is no available money to pay a loan in full as your bullet repayment date approaches, the property can be sold with the proceeds used for the payment of the principal, or the loan on the other hand can be refinanced which means that you have to take another loan to cover the bullet repayment.

In some certain circumstances or scenerios, most lenders might offer you the option to convert your loan to traditional amortization loans instead of you facing a huge one time payment

Conclusion

I have explained everything you need to know about Bullet Repayment in the article above. I hope you were able to get a better understanding of the term.

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