Bow Tie Loan

When you see someone at a party wearing a bow tie, your first thought might be that they have a lot of money, or are the intelligent professor type, or are a regular contributor on Fox. Occasionally, you might be right on all three counts.

With a variable interest rate, a bow tie loan is a short-term loan, and has a predetermined interest rate limit. However, this doesn't mean you're off the hook if interest rates rise above this limit. If they do, the lender tacks on that higher interest amount to be paid when the entire loan comes due at its maturity date.

Example.

Let’s say you take out a $200,000 bow tie loan that has a current interest rate of 10%. The lender has set a limit on the interest rate that it can’t go higher than 15%. If rates do rise to 15%, you'll be paying $30,000 in interest. Sounds like a great deal until interest rates rise to 20%. Normally, you would now have to pay $40,000 in interest, but the lender takes the difference ($40,000 - $30,000 = $10,000) and defers it until the loan becomes due.

This can be viewed as an increase in principal to be paid back, or as deferred interest to be paid at the maturity date. You'll have lower monthly payments, but a larger amount to pay back in the end.

Bow tie loans are something of a rarity, as they're viewed as having contributed to the mortgage crisis of 2008. But for those with substantial finances and the ability to keep track of the deferred interest they're accumulating, a bow tie loan might be attractive. Like...substantially more attractive than the kind of person who typically wears a bow tie.