Balloon payment

What is balloon payment?
Balloon payment is the lump sum payment tied to a loan, mortgage, or commercial loan. This payment is usually made towards the end of the loan period. Balloon payment is higher than what you could pay for the loan on a monthly basis.

Description: The balloon payment can be part of both the fixed and the flexible interest structure. By attaching a balloon payment to a loan, the borrower can reduce the interest payment that the borrower makes on a monthly basis. This can only be possible because the entire loan is not amortized.

The good part about the balloon payment is that they have lower initial payments. They are ideal for companies or borrowers who are suffering from short-term liquidity shortages but expect liquidity to improve in the future.

If a loan has a balloon payment then the borrower will be able to save the interest cost of the interest outflow each month. For example, person ABC takes a loan for 10 years. In this type of no balloon payment loan, his / her entire loan will be amortized in small monthly payments until the time of payment of his / her entire loan.

If the payment is made by airmail, the entire principal amount is usually paid out in the form of a capital towards the end of the term. The total amount paid out towards the end of the term is known as the "balloon payment".

Customers find it convenient to make a balloon payment, especially those who do seasonal jobs and expect strong cash flows before the loan term expires. However, if they are unable to make that payment, they may have to forego the past payment and return the product or consider refinancing through another loan.

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