Balloon Loan

Financial Dictionary -> Loans -> Balloon Loan

A Balloon Loan (sometimes known as a bullet loan) is a loan that requires a large sum of money to be paid when the loan term is complete. The full amount cannot be paid off in the timeframe given, so therefore the remainder of the loan is paid off in bulk at the very end. For example Tom has a $100 balloon loan over a 5 week period at $10 per week. On the last payment he must pay $50 to pay off the full amount. This type of loan is usually done with smaller amounts of money over a smaller time period, or with housing mortgages. It is very common for the majority of the loan to be paid back at the end and any monthly repayment that does take place can be relatively insignificant compared to that final payment. It can also be that no monthly payments take place and the whole loan is paid back in one amount at a set amount of years later. This kind is rare.

We say that the loan does not fully amortize (get paid off) over its term, so therefore the bulk must be paid at the end.

A balloon loan can be very attractive to a borrower or somebody desperately wanting their own home, although they need to be very disciplined in making sure they have that bulk of money at the end of the term. Most people are drawn to balloon loan mortgages because they have generally low interest rates and they offer flexibility. For example one month you may want to splash out on a new TV, so the month after you cut back on other costs to keep you savings on track for the final payment. If you were paying back the loan on strict monthly terms you wouldn't be able to splash out on a whim.

Sometimes a balloon loan will allow negotiation of new terms at the end if there is a problem with paying it off. This usually results in a resetting of the interest rate if the interest rate was fixed to begin with.