What is a Bullet?
Bullet is usually short for bullet payment, which is typically a large payment made near the end of a loan that does not amortize over time.
How Does a Bullet Work?
Unlike a loan whose total cost (interest and principal) is amortized – that is, paid incrementally during the life of the loan -- a bullet loan's principal is paid in one sum at the end of the term. That sum is called the bullet. Sometimes the interest is collected as part of the bullet payment as well, though in many cases the loan is interest-only during the term of the loan with only the outstanding principal due at the end.
Suppose someone takes out a loan for $1,000 that must be repaid in one year at an interest rate of 10% compounded annually. If the loan has a bullet, this person would have to pay $1,100 ($1,000 in principal plus $100 in interest) in one payment at the end of one year.
Why Does a Bullet Matter?
Loans with bullets have the advantage of not having to immediately begin paying back the loan. This can be preferable for companies that do not anticipate having enough cash flow in the near future. The borrower must, however, be prepared to repay the principal and interest in its entirety at the end of the term.