Balloon Payment

What is a Balloon Payment?

A balloon payment defines a large sum of money that remains due towards the end of a balloon loan like a commercial loan, mortgage, or any other amortized loan type. Commonly, it is regarded similar to that of a bullet payment.

Balloon payment loan is set for a short term, and only a specific portion of the principal balance of this loan gets amortized. And, the remaining balance is due in the form of final payment, which the person has to pay during the end of the tenure.

Knowing Balloon Payments

Balloon specifies that the final payment is substantially large. Thus, such payments turn out to be at least two times more than the previous payment of the loan. In comparison with consumer lending, these payments are more common in commercial lending as an average homebuyer generally doesn’t know how to pay a large payment at the end of the loan tenure.

In the balloon payment mortgage, the borrower has to pay a specific interest rate for a certain period of time. And then, the loan gets reset, and the balloon payment goes into either a new amortized mortgage or the continuation of the previous month at the current Market.

This process of resetting is not automatic but depends upon several factors like the consistency of remaining payment, timely payments made by the borrower, and more.

Pros and Cons of Balloon Payment Loan

Considering the complexity that balloon loans come with, it is always recommended that these be used by qualified, Income-stable borrowers. If you consider this balloon payment example, this loan type could be an appropriate choice for those investors who want to decrease their short-term loan costs and break restrictions from the Capital.

As far as businesses are concerned, balloon loans can easily be used by such companies that have immediate financing requirements and foreseeable future income. For a regular borrower, however, this scheme could be risky as the future is always at stake.

Being an average borrower, if you are looking forward to purchasing a car or a house, you can go with a simple loan on your current income.

Pros

• Low or absolutely no initial payments
• Allow borrowers to get affordable short-term capital
• Helps to cover financial gaps

Cons

• Costs can be higher in the long-term, especially if it is an interest-only loan
• Has more risk than a traditional loan
• No guarantee of refinance