Balloon Payment

What is the definition of a Balloon Payment?

Definition

A balloon payment is a financial term used to describe the lump sum payment attached to a loan, mortgage, or commercial loan. This payment is usually made at the end of a loan tenure or balloon loan tenure, and it is usually higher than what the borrower would have paid on a monthly basis. It may still tend to benefit the borrower since he/she would be able to cut down on all monthly based interest rates since the entire loan not amortized.

Example;

If borrower XYZ takes a 4-year loan probably worth $4,000 on a regular loan plan with no balloon payment deal, the entire loan will be amortized into small monthly payments with interests on each payment. But if it’s a “balloon loan” the borrower will be allowed to skip monthly payments and pay the entire amount (principal) by the end of the loan term.

Understanding Balloon Payment

A balloon payment can fit into a fixed or flexible interest rate plan. They also have lower initial payments and are preferable for borrowers who might be experiencing a short term cash crisis with an expectation of liquidity to improve in due time. Since a balloon payment cuts out monthly interests, the borrower will be able to save on the interest cost every month and focus on the overall payment by the end of the loan tenure. A balloon payment is more ideal for commercial lending considering the large sum that is expected to be paid by the end of the loan term.