Bullet Loan: Definition & Meaning | Bondfish
Bullet loan is a loan structured to repay its entire principal in a single lump-sum payment at maturity, with the borrower paying only interest (no scheduled principal reduction) during the term.
What it means
A bullet loan's payment structure is the opposite of an amortizing loan, where each payment includes both interest and a portion of principal so the balance shrinks steadily to zero by maturity. With a bullet loan, the balance stays unchanged until the final payment date, when the full amount falls due at once. This mirrors how most bonds work: a bond's coupon is effectively an interest-only payment, with the principal returned as a single "bullet" at maturity.
Bullet loans are common in commercial real estate and corporate lending, where borrowers prefer lower payments during the loan's life and plan to repay or refinance the lump sum at the end.
Why it matters for bond investors
Keeping payments interest-only preserves a borrower's cash flow during the loan term, but it concentrates all the repayment risk at maturity. If the borrower's finances have weakened, or refinancing markets have tightened by then, the lump sum can exceed what it can comfortably pay, raising the odds of default or a distressed refinancing right at the maturity date. For bond investors, this is the same structural risk present in any bullet-repayment bond: the issuer's ability to repay the full principal at once, not just to keep paying coupons along the way, is what ultimately matters.
Example
€10,000,000 bullet loan, 5-year term, 6% annual interest:
Years 1-5: interest-only payment of €600,000/year
Year 5 (maturity): final interest payment of €600,000 + full principal repayment of €10,000,000
(An amortizing loan of the same size would instead reduce the €10,000,000 balance gradually across all 5 years.)
Related terms
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.