Those who were interested in a loan in recent years, when the interest rates for a loan as well as savings deposits were still at a much higher level than at present, were often offered by the banks a so-called “bullet loan” . In particular, if the purpose of a borrowing was the acquisition of a property. Especially with real estate financing, the “bullet loan” was the form of financing for many years. But in recent years, this type of loan fell more and more in the financing of a property and was replaced by the classic installment loan . But why did this change happen? The reason for this lies in the construction of the “bullet loan” or its absolute dependence on the interest rate situation on the capital market. Let us take a look at the credit market for a better understanding.
The bullet loan: what is it?
In simple terms, a term loan defines a combination of a repayment-free loan and a savings plan to increase capital. As a rule, this is a fund savings plan or a capital-building life insurance. A precondition for a term loan model is that the term of the loan is absolutely identical to that of the savings plan. In the practical application of the term loan – for example, in the form of a real estate loan – the required loan amount is taken up and provided by the bank, but not repaid as with an annuity loan (installment loan) , monthly fixed rates. The lending bank receives only the monthly accrued interest on the loan, whereas the actual loan installments are paid into the fund or savings plan. For example, the loan installments are used to build up capital plus interest income, paid out shortly before the repayment term expires, and then the loan is repaid or repaid with this sum. So basically not a bad model, which only works if the interest rate situation on the capital market also allows a corresponding interest on savings of at least 3-4 percent.
Disadvantage of the bullet loan
The often shortened in comparison to a classic installment loan term for a term loan only works under certain conditions. Namely, when the return of the savings contract is higher than the interest disadvantage, which results from the lack of repayment of the final maturity loan. Thus, as mentioned in the paragraph above, a certain minimum return must be achieved. In times of low interest rates a seemingly hopeless project. The consequence would be that the minimum return on the savings deposit is not reached and thus the bullet loan is clearly disadvantageous. For if the interest disadvantage is higher than the return on the savings contract due to the non-repayment of the savings contract, the annuity loan (installment loan) is the economically more sensible alternative.
Long-term interest-rate lows lead to short-term credit ad absurdum
If interest rates on savings deposits are at historical lows, as is the current situation, the functional principle of the term loan can not work out. For years, the ECB has been screwing down so-called interest rates, which means that savings are simply not worthwhile due to barely realizable interest gains. Thus, the offer for bullet loans (for the time being) once at the end.