Bow Tie Loan - Explained
What is a Bowtie Loan?
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Table of ContentsWhat is a Bow-Tie Loan?How Does a Bowtie Loan Work?Bow Tie Loans and Negative Amortization
What is a Bow-Tie Loan?
Bow-tie loans are primarily short term variable rate loans. Bow-tie loan is issued with a predetermined interest rate. It delays any unpaid interest charges above a predetermined interest rate by rolling the interest into the principal amount. This may lead to an extension of time for repayment since there will be an increment in the principal sum. Bow tie loans interest is affected by the rising and falling in the market interest rates. This interest cannot rise above the predetermined interest rate limit, no matter the fluctuation in the market rate.
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How Does a Bowtie Loan Work?
For example, a company or an individual might take out a bow tie loan with the interest rate at 12% with a maximum rate of 20%. Interest on the loan will fluctuate with the market, but if the interest rate exceeds 20% the debtor will be liable to pay for the increment but the payment of the increment will be deferred until the loan is mature.
Bow Tie Loans and Negative Amortization
Bow tie loan is an example of negative amortization. Negative amortization is when the principal of a loan increases because the interest accrued over time is not covered by the loan payments. Some other examples of negative amortization are;
- Student loans
- Unpaid credit card balance
- Adjustable-rate mortgages (ARMs)
- Real Estate Loans
The intention of the negative amortization loan is for flexible payment options where it allows for minimum monthly payment rather than full payment. The loan is for people who are financially stable, or who got paid after the completion of large projects or for homes that appreciate faster than the interest rate of the mortgage