What Is a Balloon Payment?
Nowadays, a lot of people are in need of quick money, either to cover their bills and rent or to even buy a house or a car. That’s when they turn to balloon payments. What exactly is a balloon payment? Simply put, a balloon payment is when you pay a larger amount at the end of the life of a loan. Here we will talk more about balloon payments and how they work.
The definition of a balloon payment is very easy. To explain it in a simple way, it’s a bigger payment on a business or consumer loan, where a borrower agrees to make a larger balloon payment at the end of the life of a loan in exchange for lower periodic payments. Basically, a balloon loan is set for a short period of time, where at the end of a loan, a borrower pays a larger amount.
How Does a Balloon Payment Work?
Now that we covered what actually is a balloon payment loan let’s take a look at how it works. This type of loan is usually available only to people with good credit scores and a steady flow of income since the borrower needs to pay a larger amount at the end of the loan term. Once you take out a loan with balloon repayment terms, it will mean that in the initial stages of a loan, you will have lower monthly payments, but when the life of a loan comes to an end, which can be a few months or years, you will be required to pay a larger amount. Another thing to remember is that this type of loan requires one large lump sum at the beginning of a loan.
Balloon Auto Loan
Balloon payments have a couple of examples to them, and balloon auto loans are one of them. Although auto loans are not as common as mortgage or business balloon loans are, they are still available to borrowers. They are also short-term. It’s important to note that with a balloon auto loan, you can have lower interest rates, but unless your income doesn’t increase over time or you don’t make your payments on time, you could end up in debt. Make sure you understand that if you take out this loan, it will not make a car more affordable. It will only spread the total cost of a car in a different way. That’s why it’s important to pay the loan back in full on time.
Balloon Mortgage
A balloon payment mortgage is the most common form. It allows people to have an interest-only home loan, which gives them the possibility to defer paying down a principal for 5 to 10 years. Instead, they are only required to make interest payments solely. It’s typically used by people who have higher net worth and are able to put in a large down payment. This type of loan can be very risky since if the market goes down, the borrower might not be able to afford the final large payment and can go into debt.
Before deciding to get a balloon mortgage, make sure you fully understand the terms and conditions and consult with a financial advisor.
Balloon Business Loan
Balloon business loans are commonly used to finance commercial real estate purchases. They are as well short-term loans, and they provide the businesses with the needed capital while they are waiting for a larger payment. Also, they can be a very helpful tool for companies that are moving or expanding since the deferred payment schedules give companies the possibility to sell their old offices before they need to make a big payment at the end of the loan. Like with any other form of the balloon payment, they can be risky for businesses if they are not able to get a steady stream of income.
Balloon Payment: Pros and Cons
Pros:
- Fast to get
- Lower initial payments
- Easy to get
- Can help get the needed money to cover the financial gap
Cons:
- Riskier than traditional loans
- The cost of a loan can be higher, especially in the interest-only loan
- A borrower can end up in foreclosure if they are unable to repay the loan
- Have fixed rates
Pros
They are fast and easy to get, that’s why they have become popular over time. With balloon payments, you can get the needed money to cover the financial gap until you get your salary. All of this makes them desirable for borrowers.
Cons
On the other hand, if you are unable to pay the big payment at the end of the life of a loan, you could end up in debt. Because of that, they tend to be riskier, and you can as well end up in foreclosure.
What Happens If You Can’t Pay Your Balloon Payment?
If you are unable to pay your balloon payments on time, you could end up in debt, and you will go into foreclosure. Some lenders find this loan very risky, so they can request collateral from your side to secure it, so if you default on the loan, they can seize your house or a car. On top of that, your credit score will take a huge hit, and you might have problems in the future.
It’s always recommended to consult with a financial advisor before signing your name on the dotted line.
Are Balloon Payments a Good Idea?
Generally speaking, like any other loan, balloon payments come in handy in some situations. They can certainly help you get the needed money fast, being either a consumer loan or a car loan. If you are on time with your payments and you are certain you will have an increase in your income, they can help you get a car or even help you buy a house.
Although we can’t tell you if it suits you and your financial abilities, since it all depends from person to person, they can help when the money is tight and you are expecting a large amount to come in the future. To better understand if this is a good idea for your budget, you can always find a calculator online to see how much you will have to pay and for how long. Also, do your research before taking this loan.
Final Thoughts
A lot of people turn to balloon repayment loans since they can get the money fast and easy, but they are unaware of the risks this type of loan can bring. This can result in debt and even foreclosure. Because of that, in this article, we explained more about how they work and when this loan can be a good thing.
If you are in consideration of getting a balloon loan, we hope this article helps you understand them better and informs you about all the pros and cons they bring. We also advise you to always do your diligence before putting your name on the dotted line.
