What is a Balloon payment?
Balloon payment (Definition)
A balloon payment is when you agree to pay a one-time, lump-sum amount to your lending institution at the end of the loan's term – a “balloon” payment. As such, you will only be required to pay interest on a fraction of the principal because you will be required to pay a lump amount at the conclusion of the loan. And as you are paying a large portion of the loan at the end, it reduces your monthly payments. Depending on the duration of the loan period and other factors, the payment could even amount to up to 50% of the total loan amount. Essentially, a balloon payment agreement provides lenders with the opportunity to reduce your monthly repayments by a significant amount. If your circumstances change (such as you change jobs to higher earnings), lenders may even allow you to change the amount of the balloon payment, which will in turn change your monthly repayment figures.