What characterizes a bullet loan?

What characterizes a bullet loan?

• A. Loan repaid in installments over time
• B. Loan repaid in full at maturity
• C. Loan that has no prepayment penalties
• D. Loan with a variable interest rate

Answer: (B)

A bullet loan is characterized by its repayment structure, where the entire principal amount is due in one lump sum at the maturity date, rather than through incremental installments over the loan term. This means that the borrower makes periodic interest payments during the life of the loan, but the total principal is repaid only at the end of the term. This feature can be particularly appealing for borrowers who may have expected cash flow or refinancing options available when the loan matures. In contrast, loans that are repaid in installments involve regular payments of principal and interest over the term, while those with prepayment penalties may impose additional costs for paying off the loan early. Lastly, loans with variable interest rates fluctuate with market conditions, which is independent of the bullet loan structure. The key defining characteristic of a bullet loan is its full repayment of principal at maturity, making this choice the most accurate representation of what defines a bullet loan.

A bullet loan is characterized by its repayment structure, where the entire principal amount is due in one lump sum at the maturity date, rather than through incremental installments over the loan term. This means that the borrower makes periodic interest payments during the life of the loan, but the total principal is repaid only at the end of the term. This feature can be particularly appealing for borrowers who may have expected cash flow or refinancing options available when the loan matures.

In contrast, loans that are repaid in installments involve regular payments of principal and interest over the term, while those with prepayment penalties may impose additional costs for paying off the loan early. Lastly, loans with variable interest rates fluctuate with market conditions, which is independent of the bullet loan structure. The key defining characteristic of a bullet loan is its full repayment of principal at maturity, making this choice the most accurate representation of what defines a bullet loan.