Balloon Payment

What is a Balloon Payment?

A balloon payment is a payment that is larger than a regular loan payment and is made at the end of the loan term for certain types of loans, which in turn can reduce the amount of your previous payments.

Definition of a Balloon Payment

The concept of a balloon payment can be explained as a lump sum, larger than the usual scheduled payments, that is paid once to the lender at the end of the loan term. As a result, you will only be required to pay interest on a portion of the principal, since you will pay the lump sum when the loan term ends. Since you pay off a large portion of the loan at the end, this reduces your monthly payments. Depending on the loan term and other factors, this payment can amount to as much as 50% of the total loan amount.

What are the pros and cons of using a large final payment?

While loan obligations are generally a source of stress for borrowers, using strategies to ease this burden, such as a balloon payment, has advantages. For example, it can be used to pay off loans with low initial payments, such as auto loans, where the low initial payments allow you to manage your cash flow. However, one drawback of this solution is that it requires significant liquidity, which can impact your other savings rather than adhering to a scheduled repayment plan.

Examples of loans suitable for a large final payment

• Lease-to-own financing (for cars).

• Certain types of mortgage loans.

Related term: a mortgage is a type of banking product designed to lend you money to purchase a home, provided that the property is mortgaged to the bank as collateral until you have finished making your payments.

Compliance disclaimer

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