Important Risk And Benefits Of Balloon Payments For Your Next Loan

A balloon payment is described as a large payable amount remaining at the end of a balloon loan, which is typically offered for a short duration. It is specially designed to reduce your repayment stress during the loan’s initial tenure. The payment amount is less initially or may increase gradually, with the last payment involving a significant sum.

A balloon payment can impact both borrowers and lenders in terms of:

• Affordability of the loan 
• Amount of interest paid over time
• Possibility of default 

Now that you know the meaning of balloon payment, know about its benefits and other features to maintain good financial health. 

How to Benefit From Balloon Payments

Such loans come with lower instalments throughout the tenure, so you can enjoy more liquidity. Further, you can usually get a lower interest rate on such loans, but this depends on the type of  loan you are applying for and your eligibility. That being said, here are instances where this type of repayment may be right for you:

• You can utilise balloon loans if you are planning to sell an asset by the time the loan’s tenure comes to an end and use the proceeds to repay the loan 
• You can apply for a balloon loan in case of short-term requirements. For example, if you’re expecting a large sum of money at the end of a certain period, you can opt for it
• If you’re in the initial stage of your career and expecting your income to progress over time, you can opt for balloon loans
• Smaller monthly payments allow you to have more money available each month, which can be ideal if you have fixed obligations through the loan’s tenure

Process of Calculating Such Payments

Calculating your instalments and the payment due at the end of the loan’s repayment window may seem complicated, but online balloon payment calculators can help. Here’s how you can understand how they are worked out:

• The repayment amount will include the principal amount and interest rate as well as the tenure you are borrowing for 
• To calculate your lump sum payment, use the loan’s interest to find the future value of all your monthly payments at the end of the loan’s term 
• The difference between your original loan amount and this future value is your payment, which you owe at the end of the tenure 

Calculate your Personal Loan EMI

Balloon Loan Examples

You can make an informed financial decision by knowing about how balloon loans may work in the context of taking financing for various requirements. Here are some examples to consider:

• Financial institutions may offer balloon mortgages where you may pay only the interest amount as EMIs and the entire principal at the end of the tenure. Such home loans may be ideal if you want to sell the home you are buying with the loan amount at the end of the tenure or have a substantial payment coming up to help you pay the amount in one shot. 

Also Read: What Is EMI?

• You can also take a vehicle or auto loan in this way and repay up to 50% of the amount due at the end. You can repay the rest of the 50% amount throughout the tenure in equal instalments. 
• A business loan may also be a viable option in this case, as it allows you to keep your cash flow stronger with low instalments until the large payment is due. This helps if your expenditure during the tenure is higher, and you expect your business revenue to cover the payment by the end of the tenure. 

Also Read: How to Grow your Business with Personal Loan

Risk Factors Associated With Balloon Loans

Since balloon loans require a substantial lump-sum payment, financial companies are wary of offering it to all applicants. This is why the eligibility criteria are strict and you may not qualify for such a loan unless you can prove you have the ability to make the payment. 

Secondly, since the lump sum payment is 50% or more of the total amount to be repaid over the loan’s lifetime, it can cause financial strain. Choose this type of loan only if you are confident of your ability to repay on time. 

Since balloon loans involve risks of defaulting, you may consider other loans that allow you to repay in equated monthly instalments. In this case, go for the Fibe Instant Cash Loan. You can get up to ₹5 lakh with nominal paperwork at an affordable interest rate. What’s more, you can pay off your loan early without any preclosure charges. To get it now, register on our website or download the Fibe App for a hassle-free experience. 

FAQs on Balloon Loans

What is a balloon loan example?

Housing loans, auto loans and business loans may offer you the freedom to make balloon payments. 

What is balloon payment meaning?

This repayment structure is when you make small or no payments during the term of the loan and make a large lump-sum payment at the end of the loan’s tenure. 

Is a balloon payment a good idea?

It depends on your financial situation and needs, as it involves a huge payment at the end of the repayment window but gives you more financial flexibility throughout the tenure. 

What is a 5-year balloon payment?

This refers to when you have to make the final payment against your loan at the end of 5 years.