What is Balloon Payment on Loan? When is it Required?

Balloon Payment Meaning

When you take out a home loan or a mortgage loan, you are required to make repayments to the lender that comprises both the principal amount as well as the interest component levied on the loan. If the loan amount is significantly big, the repayment tenure is longer which makes the interest component quite hefty.

You will even find instances when the interest component is actually greater than the principal. This makes the loan quite expensive from the borrower’s perspective.

To make the loan more affordable, the home loan borrower may opt to make a balloon payment.

What is a Balloon Payment and When is it Required?

As the term suggests, a balloon payment loan is nothing but a lump sum payout to the lender towards the home loan or mortgage loan. The payment is made towards the end of the loan period and the amount is generally greater than the monthly instalment figure.

Attaching a balloon mortgage means the borrower can bring down the interest component on the loan as this does not amortise the entire loan. Overall, this helps to make the monthly instalments more economical in the borrower’s pocket.

The balloon payment is common in commercial lending circles as the average individual home loan customer will not be able to make hefty balloon payments to the lenders.

Why Balloon Payment is Beneficial?

Are there good enough reasons that support why you should go for a balloon payment at all?

The reason why you should make a balloon payment is to ensure that you can bring down the monthly installment amount on your home loan or mortgage loan to a manageable figure. Generally, when you make the balloon payment, the initial EMIs on such borrowings are quite low.

If you are an individual or company that generates income on a seasonal basis, then making a balloon payment suits your interests. Alternatively, if you are currently facing a cash crunch but know that the situation will improve in the near future, then opting for a balloon payment is beneficial.

The ultimate benefit of a balloon payment loan is its interest saving potential. If you have a loan that does not come with a balloon payment clause attached to it, the complete loan will be amortised. On the other hand, if it has the balloon payment clause in the agreement, a lump sum payment towards the end of your repayment tenure only makes the principal element to be amortised over that period.

It is advisable to check with your lender to know if their policy allows such payments. Alternatively, you can take a home loan with a longer tenure so that your EMIs are manageable within your budget. As and when you get extra income, you can use it to make part prepayments towards your home loan. Such payments help in bringing down the tenure considerably, and you can also save on the total interest payout. For home loans taken for non business purposes on floating interest rates, there won’t be any prepayment charges applicable.