A balloon payment is one example of financial lingo that can be very confusing. Often we get involved in situations that we don’t really understand. We’re going to be delving into financial terms that not only cause confusion, but can cost you more than you bargained for. Balloon payments are a perfect case in point.
What is a balloon payment?
A balloon payment is a lump sum payment that’s attached to a loan which could be in the form of a mortgage, car payment or personal loan. It has a much higher value than your regular repayment charges and is typically applied at the end of the loan period.
What is the advantage of a balloon payment?
A balloon payment allows you to defer a predetermined amount or percentage of the total amount of your loan to a lump sum at the end of your finance period. This allows you to make much lower repayments than you would if the entire amount owing was spread out during your finance term.
What is the disadvantage of a balloon payment?
The disadvantage of a balloon payment is that at the end of the term you have to come up with what can be a HUGE lump sum payment to pay off the remaining balance of the loan in full. Unless you’ve been very diligent about budgeting and squirreling away the money for being able to make that special payment, chances are you’ll be left in financial hot water.
Is a balloon payment right for me?
If you are VERY sure of what your financial situation will be by the end of the loan term and you know with certainty that you’ll be able to make your balloon payment, then it may be right for you. However, for the majority of consumers, this type of financing may pose too big a risk. At the end of the loan term if you don’t have the money for the larger repayment amount and if refinancing isn’t an option you could lose your car or house (or whatever you’ve financed).
Are you heading into financial trouble due to an upcoming balloon payment?
Are you in financial hot water as result of an upcoming large loan repayment? Are you struggling with debt? Contact the Ira Smith Team. We’ve got the solutions to your debt problems. Book a free consultation today and Starting Over, Starting Now you can rid yourself from an unmanageable debt load. Watch for future blogs when we’ll be discussing other confusing terms that can impact you financially.