A balloon payment is a lumpsum payment method that is significantly larger than all other payments made before it. It is paid at the end of a loan’s term. Balloon payments facilitate the borrowers to reduce the fixed payment amount. They can make a larger payment at the end of a loan’s term. Borrowers benefit most from these loans, and they can have excellent income and credit. Typically used for mortgages and auto loans, balloon payments are quite commonly used by people looking to finance their car or home with low mortgage payments. Some lenders provide these loans to customers with sufficient cash on hand and a stable income stream. Balloon payments have a high risk due to lump-sum payments, and they are usually restricted to most income-stable and creditworthy borrowers. In this article, we will bust some myths associated with balloon payments and share some facts with you – let’s begin:
Pros and Cons of Loans with a Balloon Payment Method
There are multiple pros and cons of the balloon payment method. This facility can only be used by income-stable borrowers and qualified business owners. The investor who is looking for ways to minimize the cost of short-term loans to free up capital can go for this option. Businesses with instant financing needs and foreseeable future income can also use balloon loans.
It is risky for an average borrower to take a balloon loan based on a mere assumption that in the future you will have financial growth. In case you have a goal to purchase a car or a house, it is advised that you opt for a monthly budget and take a loan that you can pay with your monthly income. You can also save it to offer a bigger down payment later if you are not in a rush for a purchase. This way you can buy a comparatively expensive asset with a small monthly saving.
- Minimal or no initial payments. You are not bound to pay initial payments. You can have low payments or initial payments, to begin with.
- You can have access to short-term capital by borrowing through balloon payment.
- You can cover financial gaps effectively.
- In interests-only loan types, your costs will tend to be much higher in long term.
- The payment schedules pose a higher risk as compared to traditional loans.
- You might not switch the debt obligation because there is no guarantee of a refinancing grant.
Balloon mortgages are often interest-only loans. These enable you to make 5–10-year payments that are interest-based. High net worth buyers prefer this payment method.
Balloon loans are not much affordable. They help secure lower monthly payments. You should not get a balloon payment if there is no guarantee that your income will substantially rise.
Businesses take balloon loans for short-term financial needs. A growing business can afford a balloon payment. In case your industry takes a hit, you will be struck with a huge outstanding debt.
A balloon payment method is a one-time payment method that is provided at the end of a loan term. It is more than two times the average monthly loan. It can range from hundreds of thousands of dollars, and you can pay off the remaining balance as the loan term ends. It is one large payment. Before opting for it, make sure you can make the balloon payment at the time it will be due.