Since balloons have become the center of the spotlight now, it is time to shed some light on how does a balloon loan work, what are the benefits of a balloon loan, and crucial things like how to calculate balloon payment.
Balloon loan payments calculation is pretty easy; there are tools for computation as well. Before you dive headfirst into opting for a balloon loan payment, it is crucial to learn some essential things like how to get rid of a balloon payment, etc.
Table of Contents
- 1 What Is A Balloon Payment Loan?
- 2 How Does A Balloon Loan work?
- 3 How To Pay Balloon Loan Payment?
- 4 Benefits Of A Balloon Loan
- 5 Drawbacks Of Balloon Loans:
- 6 How To Get Rid Of A Balloon Payment?
- 7 Your Best Choice
What Is A Balloon Payment Loan?
Balloon payment loans are new and made quite an impact amongst the buyers. These loans are mostly offered to homebuyers and those who are in the market for automobiles. Unlike conventional loans where you have to pay a high amount of money every month, including interests, etc. you don’t have to do that in balloon loan payments.
These are designed in such a way that you will have to pay a relatively lesser amount each month, and then once the loan time duration is complete, you will have to make a larger payment. The larger payment at the end is the reason this loan is called the balloon loan payment.
How Does A Balloon Loan work?
This loan is mostly for people who are buying something expensive and need some to collect the final amount. While they get their hands on the final amount, the borrower has a chance to pay off a relatively lesser amount of money every week.
The amount divided for the months is done in such a way that by looking at the monthly payments, one might say that this looks like a 20-30 year long term loan, but it is mostly up to seven years.
How is this done? It is easy to explain. After the duration of the monthly loans is over, the borrower has to pay a large sum and complete the payment. The part below on how to calculate balloon payment explains it better.
How To Pay Balloon Loan Payment?
The reason why this is considered to be a convenient style of loan is that it gives the borrower the liberty to pay at his own pace. There have been many questions about how to pay balloon loan payment. Let’s go over this first in theory and then by using the balloon payment formula and the balloon loan calculator.
In theory, think of it as you’ve made a purchase, and when the amount of the loan gets divided, it gives you an estimate of 25 years to complete. But here’s the catch! When you start paying for the amount, the monthly payments will cover up around 15 years of payment, and you can pay the amount left for the next ten years in one go.
Now, coming to the formula.
Balloon Payment Formula
For those of you who are looking for a specific amount, you can do it by using the balloon payment formula. The formula is below:
i= period interest rate
n = total number of payments
A = periodic payment amount
P = amount of loan owing (subtracting any down-payments)
B = Final Balloon Payment
Simply enter your specific values in the formula given above, and you will know how to calculate balloon payment.
Balloon Loan Calculator
If maths isn’t your strong suit, then there is a balloon calculator to aid you as well. All you have to do is enter the figures for the original balance, the payment, the rate per period, and the total number of payments. Enter these values, press enter, and let the calculator do the magic.
Benefits Of A Balloon Loan
1. Lower Interest Rate
A massive setback that people face while taking loans is that of the interest rate. For traditional loans, the interest rate keeps increasing, and, in no time, you find yourself in debt trying to pay off the loan. That will not be the case when it comes to balloon loans. With balloon loans, you will have to pay a much less interest rate on the monthly payments.
2. Expecting Increase In Income
Balloon loans are the best option for people who may be earning less right now but expect to have a higher income in the future. They can pay off the lesser amount every month from their current salary and pay the last sum when they receive their increased income. These work well for people who are awaiting bonuses, etc. as well.
Sellers are another group of people that can benefit from the balloon loan system. If they wish to sell their house, they can pay less money every month for a while. These will also allow them to net spend a lot of their income in the interest rates, etc. Moving on, by the time the lesser payments are completed, they can sell their house and pay the more substantial sum at the end of the loan duration.
Drawbacks Of Balloon Loans:
1. Unknown Future
The biggest dilemma that one can face is the unexpectedness of the future. You can never know what the future has in store for you. Keeping a considerable amount of payment for the end, that too, as a one-time payment might leave you hassled and in debt.
2. Interest Rate Burden
Keeping interest rates in mind, if the situation of the economy forces the market to raise the interest rate, balloon loans will make your loan payment as horrible as it can be with traditional mortgages. Since one will be paying a little amount at a time, the increased interest will add a ton of amount to it and make it difficult for the borrower to pay it off.
How To Get Rid Of A Balloon Payment?
Finally, now that you’ve read through all of that, you will have an idea of what balloon loans are and how they work. If you’ve gone through the formulas and the calculators, you may find that the system of balloon loans doesn’t work for you. It could also be too late for someone who has already signed on for one. In such a case, you should be aware of how to get rid of a balloon payment.
● Gradual Increase
The most comfortable and most convenient way of getting rid of a balloon payment is by gradually increasing the monthly loan amount every year. It means that if you are paying $500 every month in 2020, you can increase it to $550 in the year 2021.
By doing so, all you are doing is increasing the amount of rent to the same amount of principal payments each year. This way, you won’t be left with an intimidating amount of sum for your balloon payment.
Gradually increasing the amount is by far the easiest way to get rid of a balloon payment without financially pressuring yourself.
Your Best Choice
Eventually, the best choice for you lies in your budgeting. One should take a right and thorough look at the yearly expenses, incoming bonuses, salary increases, and other debts and loans, etc. Also, doing the calculations with a balloon loan calculator will help you understand if you can take on the burden of a balloon loan or not.
While calculating, monthly payments might make the whole system look appealing but keep an eye on the final payment as well.