A balloon payment is a large, single payment due at the end of some loans, after a series of smaller payments. It is often substantially larger than the regular payments.
A balloon payment is a lump sum due at the maturity of a loan that is not fully amortized, after a period of smaller scheduled payments that do not pay the balance down to zero. Loans with this structure, sometimes called balloon loans, keep the regular payments lower by deferring much of the principal to the final due date. The balloon amount may be paid in cash, refinanced into a new loan, or otherwise settled, depending on your situation and the agreement. A fully amortized loan, by contrast, has no balloon payment because every scheduled payment contributes to retiring the balance by the end of the term.
Balloon payments appear when a loan's regular payments are not large enough to retire the whole balance by the end of the term. The remaining balance then comes due all at once. They are found in some mortgages, auto loans and business loans, and in short-term loans structured as a single payment.
The key question is the final payment. A borrower who cannot pay it may need to refinance, sell an asset or negotiate with the lender. Federal disclosure rules require the payment schedule to show the amount and timing of payments, so a balloon can be spotted in the agreement before signing.
Some borrowers plan for a balloon deliberately, for example when they expect to sell an asset or receive a known sum before the final payment is due. That plan only works if the money actually arrives in time, so the agreement's terms for a missed balloon payment deserve as much attention as the regular payments.
An example
A borrower is offered a loan with low regular payments. Reading the payment schedule, the borrower notices that the final payment is many times larger than the others. Planning ahead, the borrower compares it with a fully amortized loan whose regular payments are higher but whose last payment is the same size as all the rest.
Common misconceptions
Myth: Low regular payments mean a loan fits the budget overall.
In fact: If a balloon payment is due at the end, the total includes one large payment that the regular payments never covered.
Myth: A balloon payment is just the last regular payment.
In fact: A balloon is noticeably larger than the regular payments because it covers the balance they left unpaid.
Myth: A balloon can always be refinanced when it comes due.
In fact: Refinancing depends on a lender agreeing at that time. It is not something the original agreement promises.
What to check
- Whether the final payment differs from the regular payments.
- The balance left after the last regular payment.
- What the agreement says happens if the final payment cannot be made.
- How the loan compares with a fully amortized alternative.
How this applies at Desert Rock Capital
Desert Rock Capital loans have no balloon payment. They are fully amortized, so fixed biweekly payments pay off the whole balance by the end of the schedule, and every payment is in writing before you sign. There is no prepayment penalty if you want to finish early.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.