What is a Balloon Payment?
A balloon payment is an amount due after a balloon loan's specified number of years have passed.
A balloon loan is usually stated in a "pre-balloon-years/payment-based-on-years" format.
For example, if a balloon loan's payment is based on a 30-year payback period, and the balance is due after 3 years, that would be considered a "3/30" balloon loan.
This would mean that the payment amount would be calculated as if the loan were going to be paid back over a 30-year period -- which essentially lowers the payment for the pre-balloon period.
Then, after the 3-year pre-balloon period is up, the balance of the loan must either be paid off or converted into another loan.
Why a Balloon Loan?
The primary reasons you might consider choosing a balloon loan over a conventional loan, are because:
- Balloon loans tend to be easier to qualify for.
- Balloon loans typically come with lower interest rates.
Why Not a Balloon Loan?
The downside is that you risk being forced into a higher interest rate loan if you can't pay the balance when it comes due.
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