Balloon payment
A balloon payment is a large lump sum due at the end of a loan whose earlier payments did not fully pay off the balance.
Some loans are structured with smaller regular payments that do not cover the full principal over the term, leaving a big chunk owed at the end. That final lump sum is the balloon payment. The earlier payments might cover only interest, or interest plus a slice of principal, which keeps the monthly bill low. The trade off arrives at maturity. On a $100,000 loan structured this way, you might face a balloon of $60,000 or more in the last payment, far larger than anything that came before.
Balloon structures can ease cash flow in the early years, which appeals to businesses expecting revenue to grow or planning to refinance before the balloon comes due. The risk is real though. If you cannot pay the lump sum and cannot refinance when the time comes, you can be forced into a scramble. Before taking a balloon loan, have a clear plan for that final payment, whether it is saved cash, expected sale proceeds, or a refinance you are confident you can qualify for. Compare it against a fully amortizing loan that has no surprise at the end.
Common questions
What happens if I cannot make the balloon payment?
You typically need to refinance the remaining balance into a new loan or sell the financed asset to cover it. If neither is possible, you risk default, so plan for the balloon well before it is due.
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