Why Bullet Payments are necessary in Loans?
Bullet Payments refers to paying an amount of money more than the actual EMI of the loan. The good part about bullet payment is that they have lower initial payments. They are ideal for companies or borrowers who might be facing a cash crunch in the short term but expect the liquidity to improve in the future. It will be beneficial as the principal amount will be less at the end of tenure.
A bullet repayment loan gives the user the advantage of not having to immediately repay the loan. This would be helpful for those who have short term cash flow issues. However, one should keep in mind that the user has to be prepared with a lump sum amount at the end of the loan tenure.
If a person makes a Bullet Payment once or more times during the loan tenure then the borrower will be able to save on the interest cost of the interest outflow every month.
Comparing a bullet repayment loan versus one with a monthly schedule. Suppose the gold loan is worth Rs. 2 lakh for a tenure of one year with an interest rate of 14.5% per annum.
With an EMI option, you will have to pay Rs. 18,005 monthly for 12 months (which comes to a total of Rs. 2,16,060).
But if you were to take the bullet payment option, your monthly interest would add up to Rs. 29,000 at the end of the 12 months, and Rs. 2 lakh to be paid as principal.