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Balloon Payments

What is a Balloon Payment?

A Balloon Payment is a designated lump sum (from the loan amount) due to be paid at the end of the loan. By setting this Balloon Payment option up the borrower is able to reduce the repayments of the loan in exchange for owing a large sum when the loan matures.

What is the Benefit of a Balloon Payment?

By setting a Balloon Payment for the end of the loan, the borrower still pays back the loan amount but reduces their monthly repayments and frees up some of their capital during the life of the loan. Someone with good investment sense could make use of this freed up capital in areas where they may get a greater return. For instance they could have some investments that pay higher interest then what they’d be paying on the loan.

Alternatively, someone taking out a loan for a business purchase that will eventually bring a return may opt for a Balloon Payment at the end of the loan if the purchase is not likely to make an immediate return. This way they have the benefit of a better quality asset at lower repayments while they work on growing their brand and business.

Balloon Payments can also be set up for people who are intending on selling their purchase at the end of the loan. By setting up a Balloon Payment you can avoid making high repayments for something you do not intend to completely pay off in the first place. You have the option to make lower repayments during the life of the loan, and then sell the item to cover the Balloon amount.

What happens when a Balloon Payment is due?

When a Balloon Payment is due you generally have two options. You can make the lump sum payment if you have the money. This marks the end of the loan and the purchase is owned by you entirely.

Your other option is to take out a second loan to cover the Balloon Payment and continue making payments. If this is your plan it is advisable that you start looking for a loan a few months before the Balloon Payment is due to ensure you do not default.

  • Suncorp Bank
  • AFS
  • CIL Insurance