1. Bullet Payment System
Under this method of borrowing and lending, the borrower will not be required to pay back the loan and interest payments periodically like every 6 months or so. The full loan amount together with interest payments will be made at a single time on maturity of loan.
This system of lending is rare in India as there are no regular cash flows for the bank. This method of payment is adopted in term loans.
2. Balloon Payment System
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Under this system, the repayment of a term-loan facility will be so arranged that the installment value will be smaller in the beginning and as the repayment progresses towards maturity value of installments will be larger and larger. In other words, under Balloon Payment System, the borrower’s repayments are higher at end and smaller in the beginning.
This type of arrangement will be helpful to borrower who expects smaller returns in the beginning and higher returns later out of his investments. You will notice that bullet and Balloon payments systems refer to repayment of term loans. These methods are not common in Indian Banking.
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