Balloon Payment Definition
A Balloon Payment is a large, lump-sum payment made at the end of a long-term loan or mortgage term. It is so-called because it inflates, like a balloon, over the repayment period before being paid in full upon the loan’s maturity.
Balloon Payment Key Points
- It is a sizable payment required at the end of a mortgage or loan.
- This payment is typically much larger than the regular installments paid over the loan term.
- It reduces monthly repayments but results in a large lump sum due at the end.
- Balloon payments are often associated with mortgages or automotive financing.
What is a Balloon Payment?
A Balloon Payment essentially represents the unpaid portion of the loan, which has been deferred until the end of the loan term. The balloon payment is a significant amount due in one go, designed to reduce the size of the regular repayments over the life of the loan.
Why is a Balloon Payment used?
Balloon payments are used to reduce the borrower’s monthly loan repayment burden. They also allow individuals to purchase items they wouldn’t normally be able to afford by pushing a large portion of the loan to the back end of the loan term.
Who uses a Balloon Payment?
Borrowers who are comfortable they will have the necessary funds at the end of the loan term, or those who plan to sell the item (i.e., a property or car) prior to the loan’s maturity, typically opt for balloon payment financing. It can be an attractive option for both lenders and borrowers, as lenders can earn more interest over the loan term, and borrowers can enjoy lower monthly payments.
When is a Balloon Payment due?
Balloon payments are always due at the end of the loan term. The specific timing may vary depending on the terms of the loan agreement.
How does a Balloon Payment work?
Throughout the term of the loan, the borrower pays lower monthly installments compared to traditional loans. However, instead of the loan being paid off over the term, the remaining balance, or “balloon payment,” comes due as a large, one-time payment at the end of the term. This large payment could be multiple times the amount of the typical monthly payments, depending on the terms of the loan agreement.
