Bullet Loan vs Installment Loan: Which Costs Less?
When you take out a personal loan, you typically choose between a bullet (interest-only) repayment and an equal-installment amortizing repayment. A bullet loan has you pay only interest each month and the full principal at maturity. An installment loan splits principal and interest into equal payments each month, steadily paying down the balance.
For example, borrowing $10,000 at a 6% annual rate for 24 months: with a bullet loan you pay $50 in interest every month and owe the full $10,000 at the end, for total interest of about $1,200. With an installment loan you pay about $443 a month, and because the balance shrinks over time, total interest comes to roughly $630 — about $570 less than the bullet loan.
A bullet loan keeps monthly payments low, which can help with short-term cash flow, but because the principal never decreases, the total interest cost is significantly higher. If minimizing interest is your priority, an installment loan is the better choice; only consider a bullet loan if you have a solid plan to cover the lump-sum principal at maturity.
Frequently Asked Questions
A bullet (interest-only) loan requires you to pay only interest each month and repay the full principal at maturity. An installment loan splits both principal and interest into equal monthly payments. Bullet loans have lower monthly payments but cost more in total interest.
With an installment loan, part of the principal is paid down each month, so the balance that accrues interest keeps shrinking. With a bullet loan, the full principal remains outstanding until maturity, so the monthly interest never decreases.
If you need short-term cash flow relief and have a solid plan to repay the principal at maturity, a bullet loan's lower monthly payment can be worthwhile. But the interest gap widens the longer the loan runs, so weigh it carefully.