What is a Balloon Payment?

Loan repayment has many aspects, one of them being balloon payment. But what is a balloon payment? What are its advantages and disadvantages? If you have these questions, then you are at the right place.

Balloon payment is the sum which is payable to the bank on a loan. Balloon payment is made at the end of the loan period. It is usually higher than the usual EMIs paid during the loan tenure. 

Here is a list of balloon mortgages pros and cons:

• The payments in the initial tenure of the loan period are lower

• If a business is in the need of short term capital urgently, balloon payment is one of the best mortgage options

• Balloon payment gives a window to cover financial gaps

• The loan can get a little expensive 

• Since it is not a traditional mortgage system, the interest rate is higher and risk factor increases

• It can pose financial difficulties for homeowners and businesses if the positive equity drops.

• Refinancing can be problem in case of debt obligation

There are three ways to deal with balloon payment:

Of course, the first option is to pay off the debt completely and get done with it. But this is possible only if you have the capacity to shell out thousands and lakhs of money altogether.

You can pay off the existing debt by taking another loan, i.e. refinance your loan. This looks like a convenient option with big businesses.

You can sell the assets made with the loan amount and pay off the debt to the financier. This is one of the options which is opted by borrowers.

I hope now you understand balloon payment meaning, its advantages and disadvantages.

Balloon payment meaning states that the payment attached to loan or mortgage is made by the end of the loan period. In the balloon payment system, the initial payments are on a lower side, however, it is an expensive affair if compared to the payment on a monthly basis. 

A balloon payment usually works when an individual takes out a loan for business. It works well in case of mortgages as well. This scheme is mostly offered to those who have good creditworthiness and stable income.

Let us take a look at balloon payment and its application in the three cases mentioned above:

A homebuyer can opt to finance his/her home via mortgage and balloon payment method. Usually, in this case buyers opt for interest only structure wherein they pay interest to the lender and defer paying the principal amount by 5 or 10 years. By the time the loan term comes to an end, they either pay the principal in lump sum or sell off the property to cover the remaining amount.

For short term loans in businesses, balloon payment is a common measure. A balloon payment mode can work as gap financing when a business is awaiting a large payment from a customer. This can also be used if a business shifts from the old workspace to new workspace. They can repay the loan under the balloon payment scheme after selling the old workspace.

There are several advantages and disadvantages of balloon payment scheme, here is table for your reference:

This is all about what is a balloon payment, its features and pros and cons. I have tried to explain it better with examples, hope this helps :)