What is Balloon Payment?
The Short Answer
Balloon Payment explained simply
A balloon payment is a single, large payment due at the very end of a loan. It’s common in loans where the regular payments during the loan term are lower than what would be needed to fully pay off the loan. This means a significant portion of the principal is still owed when the loan matures, requiring that final large payment.
Real-World Example
Buying a Business with a Balloon Payment
Imagine you buy a business for $500,000. You get a loan for $400,000 with a 7-year term and a 15-year amortization schedule. This means your monthly payments are calculated as if you had 15 years to pay it off, making them lower. However, after 7 years, the remaining balance of the loan, which is still substantial, becomes due as a single balloon payment.
Why this matters
Balloon payments can make monthly loan payments more affordable in the short term. However, they come with a big risk: you need to have a large sum of cash available or be able to refinance the loan when the balloon payment is due. If you can’t, you could lose the asset you financed.
Always plan for the balloon payment. Don’t just assume you’ll refinance. Have a clear strategy for how you’ll make that final large payment, whether it’s through cash flow, savings, or a pre-arranged refinancing option.
Always plan for the balloon payment. Don’t just assume you’ll refinance. Have a clear strategy for how you’ll make that final large payment, whether it’s through cash flow, savings, or a pre-arranged refinancing option.
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