A balloon payment happens when a loan ends with a large final payment. This type of loan lets borrowers make small monthly payments at first. Then, they must pay a big lump sum at the end of the loan term. Balloon payments are common in some types of finance but rare in others. You can read more about how balloon loans work here.
What Type of Loan Has a Balloon Payment?
Several loan types use balloon payments. Here are the most common:
- Auto loans: Some car loans offer low monthly payments and a big final payment. You can explore how BMW offers such financing options here.
- Mortgages: Certain home loans set small payments early and a larger one later. Learn more from Investopedia.
- Commercial loans: Businesses often use balloon loans to manage short-term cash flow.
- Land loans: People buying land sometimes use balloon loans because lenders want faster repayment.
In all cases, the borrower must prepare to pay a large amount at once or refinance the loan.
Do Banks Still Do Balloon Payments?
Yes, some banks still offer balloon payment loans. However, they are less common today. After the 2008 financial crisis, lenders became stricter. Many banks now prefer loans with steady monthly payments.
Balloon loans usually come from:
- Small local banks
- Credit unions
- Private lenders
- Some car dealerships
For example, WesBank in South Africa still provides balloon payment options. Also, Santander Consumer UK offers balloon financing for personal customers.
Lenders offering balloon loans often check that borrowers understand the risk of the large final payment.
What Is an Example of a Balloon Loan Payment?
Imagine you take a $100,000 loan with a five-year term. The monthly payment is based on a 30-year schedule, so you pay about $500 each month.
At the end of the fifth year, the full remaining balance is due. This could be around $90,000. You must either:
- Pay the $90,000 in full, or
- Refinance the balance into a new loan.
You can see a full breakdown of a balloon loan example to understand how this works in real life.
This structure helps people who expect their income to rise or who plan to sell the asset before the balloon payment is due.
How Much Is a Balloon Payment?
The balloon payment amount depends on:
- The loan size
- The interest rate
- How much was paid during the loan
In most cases, the balloon payment is large. It can be 50% to 90% of the original loan amount.
For example:
| Loan Amount | Balloon Payment Estimate |
|---|---|
| $20,000 | $10,000 to $18,000 |
| $50,000 | $25,000 to $45,000 |
| $100,000 | $50,000 to $90,000 |
Borrowers must plan for this expense early to avoid financial stress later.
You can also learn the difference between balloon payments and interest-only payments if you are comparing loan options.
What Is Another Name for a Balloon Payment?
Balloon payments sometimes have other names. These include:
- Final lump sum payment
- Residual payment (often used in car finance)
- Balloon note (used for mortgages)
You can read more about the difference between balloon payments and residuals if you are considering car financing deals.
All these terms mean the same thing: a large payment at the end of a loan term.
Can I Pay a Balloon Payment in Installments?
Yes, you can sometimes pay a balloon payment in installments. Here are the main options:
- Refinance: Take a new loan to pay off the balloon amount over time.
- Loan modification: Ask your lender to change the loan terms.
- Extended payment plan: Some lenders allow you to split the balloon into smaller payments.
However, these options depend on:
- Your credit score
- The lender’s rules
- Current interest rates
Always ask the lender about installment options before signing a balloon loan.
Conclusion
Balloon payments create an easy start with small monthly payments but require a big final payment. They show up in car loans, mortgages, business loans, and land loans. While fewer banks offer them today, they still exist through smaller lenders.
Planning for the final payment is important. Refinancing, loan modification, or an extended plan can help if you cannot pay the full amount at once.
If you are thinking about a loan with a balloon payment, make sure you understand the risks and have a clear plan for the final payment. You can also use a balloon payment calculator to estimate your final payment and plan better.