Balloon payment loan
With a balloon payment loan, the final payment includes a large portion of the principal (the original amount borrowed).
Balloon payment loans allow the borrower to negotiate how much principal will be paid at the end of the loan term. The two most common options are:
- The borrower repays some part of the principal along with interest (the lender’s fee for the loan) on a monthly basis, and pays back the remaining balance of principal on the loan maturity date (i.e., when the loan is due).
- The borrower pays monthly instalments of interest only and then pays back all the principal when the loan is due.
Balloon payment loans are good for companies that want flexible repayment options and predictable demands on their cash flow—as long as they’re sure they will be able to make the final balloon payment. Often, the balloon payment ends up being refinanced on or before the maturity date, which means the old loan is settled and replaced with a new loan with a new maturity date.
More about balloon payments
The following examples show how the two main types of balloon payment loans work.
Option 1: Monthly principal payments, with the remaining balance due on the maturity date
Monthly principal payments: 60 monthly payments of $8,333.33 for a total of $500,000
Balloon principal payment: $500,000 in five years
Option 2: A single principal payment due on the loan maturity date
Monthly principal payments: 0
Balloon principal payment: $1,000,000 in five years
In this arrangement, the borrower may also make additional lump sum payments over the term of the loan.