Although this isn’t a very common term to most people, there is a loan called ‘bow tie loan’ that is used more often than you might think. The simple explanation is that it is a type of short term loan with variable rate interest which is paid only up to a certain pre-determined percentage (according to compareloans.org and then the remainder is not due until the loan matures (becomes payable). It is important to note that variable rate interest loans are subject to market fluctuations so the rates will be in constant flux.

An example of this would be a bow tie loan that has a pre-determined interest rate limit of 18%. Over time, the loan which has variable rate interest goes up to 20%. The borrower would continue paying the interest at 18% and the 2% over that amount would be tacked on to the principal to be paid when the loan matures and becomes payable in full. To visualize this, the loan is for £10,000 with a limit of 18%. The borrower pays £180 in interest but the other £20 would get added to the amount that would be payable at the end. This prevents monthly payments from going above what is comfortable for the borrower to pay.