What is Balloon Payment? Definition of Balloon Payment, Balloon Payment Meaning - The Economic Times (2024)

FAQs

What is Balloon Payment? Definition of Balloon Payment, Balloon Payment Meaning - The Economic Times? ›

The sum total payment which is paid towards the end of the term is called the balloon payment. Customers find it convenient to make a balloon payment, especially those who do seasonal jobs and expect strong cash flows before the loan term expires.

A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan.

What Is a Balloon Payment? A balloon payment is a lump sum principal balance that is due at the end of a loan term. The borrower pays much smaller monthly payments until the balloon payment is due.

A balloon payment mortgage is a mortgage that does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size.

The purpose of a balloon is to make your monthly payments more affordable, taking pressure off your budget.

Example of a Balloon Loan

Let's say a person takes out a $200,000 mortgage with a seven-year term and a 4.5% interest rate. Their monthly payment for seven years is $1,013. At the end of the seven-year term, they owe a $175,066 balloon payment.

A balloon payment is a lump sum owed to the lender at the end of a finance agreement.

"This type of payment is intended to assist with cash flow management at the start of a finance agreement, but only if you can afford it. It may help to ease the burden of monthly expenses, but buyers with balloon deals may need to use cash they've been saving to settle the balance owed at the end of term," Msibi says.

Benefits. A large balloon payment is likely to mean your monthly payments will be lower. If you love your car, you can keep it if you're able to make the balloon payment. When your term ends, if your car is worth more than the lender estimated, you could make the balloon payment and then sell the vehicle for a profit.

If you can't make the balloon payment, the lender can foreclose on your home. This could seriously impact your credit, making it more difficult to get a mortgage or even rent a home in the future. Avoiding foreclosure might require selling the home to cover the balloon payment.

What is another name for a balloon payment? ›

So, in terms of vehicle finance, it would be the amount set aside from the price of the vehicle you want to buy, to be paid at the end of the loan agreement. Because of the nature of when this larger payment is made, a balloon payment is often referred to as a 'residual payment. '

Disadvantages include: Potential financial insecurity in the future. Obligation to pay the outstanding lump sum in cash if a refinancing request is denied. Over the loan term, the interest paid results in the car costing more than its worth.

A balloon payment could make sense for homeowners who plan to live in the property for a few years and sell it before the lump sum is due. However, if the home's value decreases during that time, you may have to make up the difference between your sales price and outstanding mortgage balance.

Paying off a balloon payment

You can start paying off the balloon payment at any time – if you can afford to pay more than your monthly instalment, you can use the extra money to reduce the balloon amount, so you'll have less to pay at the end of your loan term.

Balloon payment schedule

A 30/5 structure means the lender calculates your monthly payments as if you'll be repaying the loan for 30 years, but you actually only make those payments for five years. At the end of the five-year (60-month) term, you'll repay the remaining principal, or $260,534.53, as a lump sum.

The term of a balloon mortgage is usually short (e.g., 5 years), but the payment amount is amortized over a longer term (e.g., 30 years). An advantage of these loans is that they often have a lower interest rate, but the final balloon payment is substantial.