What is a Balloon Loan? What Are Its Advantages and Disadvantages?

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Loans come in many forms, each offering unique terms that can benefit the person receiving it and the lender simultaneously.

Balloon loans are a unique case, in that they don’t require the borrower to pay off the entire cost of an asset evenly over the course of a payment term. The loan is not fully amortized over its term, meaning that a larger lump-sum payment is required at the end to pay off the remaining balance.

In contrast to other loans that see both interest and principal amounts being paid off in equal or gradually increasing amounts over the course of the payment period, balloon loans are affordable at first and costlier near the end.

This option can be helpful in some cases, depending on the finances and goals of the person receiving the loan.

If they’re wanting to save money early on and plan to have more toward the end of their payment term, balloon payments can be a viable option.

Balloon loans can also be somewhat tricky for some, as the sudden payment near the end can represent a big expense even if a person has time to prepare for it. This makes it important to consider the pros and cons before taking out this kind of loan.

What Is a Balloon Payment, and How Does It Affect the Payer?

When a person commits to a payment plan with a loan, they likely do a significant amount of research beforehand. This is understandable, as unfair or unrealistic terms can put the borrower in a tough spot.

In some cases, the wrong terms can lead to a person failing to pay back their loan, and incurring penalties and interest, or even having their assets seized.

A balloon payment is the large sum that is paid near the end before the loan has amortized.

For those who are saving up and want to have more money now even if it means having to pay more later, this arrangement can help. It allows the borrower to space out their early payments and saves the harder one for the end.

Those who are looking to restore properties or use the asset they’re paying for in order to get a big return may be able to swing a bigger payment toward the end of the loan period.

Moreover, those who are looking to make more money in the future after their loan payment program has begun would adapt well to a balloon system.

What Are the Dangers of Balloon Loans?

As mentioned, balloon loans have a payment plan that is unlike other types of loans.

Even a person who has taken out many loans before and had no trouble paying them off may struggle when the balloon payment comes along.

A person may plan to have more funding on hand during the end of their repayment period, but sometimes this doesn’t always happen.

Unforeseen financial difficulties and expenses can leave a borrower with less money than they planned, causing them to come up short with their final payment.

Balloon payment plans can sometimes cause a person to be caught off guard.

Even if they’re familiar with the payment agreement at the beginning, it can be easy to get used to the lower payments and forget the final one coming at the end.

While balloon loans do present certain dangers, there are ways to get around this. Resources and educational tools exist to help people figure out balloon loan repayment plans with or without the help of a finance professional.

Preparing for Balloon Loans and Repayment

What is a Balloon Loan

Since these loans have payment arrangements unlike other common loans, it is wise to study up beforehand and use all available resources to calculate payment terms.

A balloon loan calculator can provide insight into how big the final payment will be and how adjusting earlier payments can affect the balloon payment. It can also show whether the term of a loan will allow a person to get the type of affordable deal they want.

Discovering the amortization schedule with a balloon calculator provides insight into how long a person can enjoy smaller payments before they must pay off their balance. These resources can be somewhat confusing to use at first, meaning it can also be helpful to enlist the help of a loan officer or financial expert before committing to a loan program.

Balloon loans offer a unique payment arrangement that can be beneficial in some cases. For those who are exploring this type of loan, understanding the arrangement fully based on the term, price of the asset in question, and the balloon payment itself is important for getting a financially beneficial deal.

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