Bullet Loan

A bullet loan or maturity loan has some fundamental differences compared with an annuity loan or a loan with constant repayment. Unlike many other types of loans, a bullet loan only has to be repaid at the end of the term. After disbursement, which takes place immediately following approval, only a small monthly installment is due. However, these are by no means any repayment amounts, but merely the interest due or the regular contributions to a capital life insurance policy. A bullet loan can either be tied to a specific purpose or available to the customer for general use. Most commonly, a bullet loan is used in car or real estate financing. There are also special loans for civil servants that are deliberately designed as bullet loans.

Loans for Financing a New or Used Car

Anyone who wants to finance a new or used car can choose not only the lender but also the form of the loan. Some car loans have a classic structure, while others are characterized by very low repayment during the term and, by contrast, a high residual payment due at the end. This residual payment is often in the four-digit euro range. Although a bullet loan does share some similarities with a car loan that has a residual payment, they are not identical. With a bullet loan there is no repayment during the term, which is not the case with a car loan that includes a residual payment. Even if the monthly installment is very low, small amounts are always being repaid. A car loan with a residual payment has some advantages. Because the monthly installment is low, people who otherwise could not afford a car may still have the opportunity to finance one. However, it should also be borne in mind that the interest paid over the entire term is, in most cases, significantly higher than the interest that would be charged on a classic car loan. Another variant of the car loan with a residual payment is the three-way financing. Here the customer has the additional option at the end of the term to return the car to the dealer and thereby settle the residual payment. Alternatively, they can choose a new car and finance this car as well via three-way financing, a car loan with a residual payment, or a classic car loan. Almost all of the mentioned loan types are offered both by German and foreign banks and by car dealerships. If a suitable bank loan is found, there is a good chance the car could be paid for in cash at the dealership, which in many cases leads to substantial discounts on the total purchase price. Although there is no guarantee, these discounts can sometimes exceed 10 percent of the purchase price.

Mortgage Financing - Bullet Loan for Real Estate

A property can be financed in different ways. However, no one should embark on this undertaking without a certain minimum amount of equity and a secure income. Otherwise the desired property can quickly become a nightmare. If something unforeseen occurs, for example if the previously secure income is lost, it could very quickly happen that the property can no longer be financed. For all these reasons most lenders will only agree to a mortgage financing if the customer can demonstrate at least a 20 percent equity ratio, preferably 30 percent. Once the question of equity is clarified, further considerations must be made. In this context a decision should be made as to whether an annuity loan, a fixed-term loan, a loan with constant repayment or a bullet loan is preferred. Anyone considering a bullet loan should be aware that the bank will in this case demand additional collateral. In addition, it must be ensured in any case that the entire loan amount can be repaid at the end of the term. This is generally only easily possible if a capital life insurance policy, a substantial fund or equity portfolio or comparable security is available.

Loans for Civil Servants

Civil servants or long-standing employees of the public sector enjoy an excellent reputation with lending institutions. They have job security, a reliable income and can usually also present a spotless Schufa credit report. For these reasons, serious problems with credit approval for civil servant borrowers only occur in the rarest of cases. For all these reasons banks often provide special loans for civil servants that are characterized by a long term, attractive interest rates, a low monthly installment and numerous other benefits. In many cases a civil servant loan is structured as a bullet loan. It might have a term of 10 to 20 years and be linked to the additional purchase of a capital life insurance policy. After approval the entire loan amount is paid out in a single sum and is available to the civil servant for general use. Repayment of the loan is suspended until the end of the term. This does not mean, however, that no costs arise in the meantime. Regular contributions to the capital life insurance policy must be paid. The sum accumulated over the years is used at the end to repay the civil servant loan. If this insurance generates surpluses, which in most cases it should, the borrower will be appropriately involved in those surpluses. Whether and to what extent civil servant candidates or civil servants on probation can already receive a civil servant loan is not clearly defined. This is decided individually by the banks, savings banks or insurers that offer such a loan. A normal installment loan, which is open not only to civil servants or public sector employees but to all persons who meet the relevant requirements, is less likely to be a bullet loan. An annuity loan is much more common here. It is disbursed in full within a few days after approval and must be repaid in evenly sized monthly installments. These installments consist of an interest and a repayment component, with the interest component being highest at the beginning and lowest at the end of the term. The repayment component behaves exactly the opposite way. If a bank or savings bank were nevertheless prepared to grant an installment or consumer loan as a bullet loan, the customer should expect that the bank will insist on the additional conclusion of a credit life insurance policy, a building savings contract or a fund savings plan. In this way the respective lender wishes to protect itself against an increased risk of default associated with a bullet loan. No one knows whether the borrower's financial situation will deteriorate over the years. If there is no additional security, the lender would have no guarantee that it will receive its money back fully and properly.