Comparing the Advantages and Disadvantages of a Bullet Loan

Many consumers are starting to consider a bullet loan for their financing needs. A bullet loan is a loan that requires one principal payment at the end of the term. This type of loan is also sometimes referred to as a balloon loan as you have one balloon payment at the end of the loan. This kind of loan product is very popular and it has some advantages and disadvantages. Here are a few things to consider when it comes to getting a bullet loan.

Advantages of Bullet Loans

  • Lower payment- The biggest benefit of getting a bullet loan is that you will have a smaller monthly payment. Most of the time, you will be required to pay only the interest on the loan each month. None of the principal payment will be required from you. Since you are only paying the interest each month, it results in a lower payment for you each and every month.
  • Flexibility- With a bullet loan, you give yourself a lot more flexibility each month. If you have a good month, you can afford to pay the interest on the loan and pay some of the principal. If you have a bad month financially, you can just pay the minimum interest payment. This gives you a lot of flexibility in your monthly budget moving forward
  • New business friendly- Getting a bullet loan is very common for new businesses. New businesses have no idea what to expect as far as what their monthly income will be. Therefore, they need to get their payment as low as possible. Then if they need to, they can always refinance the bullet loan into a standard loan later on. This will give them the options that they need in order to stay in business long enough to refinance. 

Disadvantages

  • Can take you by surprise- The biggest problem with a bullet loan is that many people forget about the big payment at the end. They do not realize that the term is almost over and they do not make the necessary preparations to save up for the balloon payment. This can result in foreclosure or having to rush into another loan that you do not want to take. Planning ahead for the last payment is the only way that you can make this type of loan work.
  • High interest- Bullet loans have a tendency to come with higher interest rates than you would like. While the low monthly payment makes it seem good, the interest may actually be higher than you thought. Anytime you pay higher interest for something, it is not desirable. The total amount of money that you pay over the life of the loan can be staggering when you compare it to a loan with a cheaper interest rate.
  • May require refinancing- Many people that get this type of loan simply refinance to get out of it before the end. This results in more closing costs and more hassle that you have to go through. 

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