Balloon Loan
A balloon loan is a type of loan that does not fully amortize over its term, meaning that the borrower has to pay a large amount at the end of the loan period. The payments during the repayment period are typically lower than they would be with a conventional or amortizing loan and there may also be an option for extending the loan duration. This type of financing can be beneficial for those who need access to capital but whose income fluctuates or who plan on selling their property before having to make full payment on the debt.
How Balloon Loans Work
Typically, balloon loans only require interest-only payments throughout most of their term, although some lenders may require some principal payments as well. At maturity (or when all required repayments have been made), borrowers must either refinance or pay off any remaining balance in one lump sum – known as a ‘balloon’ payment – which can often equate to several times what was initially borrowed. This makes them ideal for short-term needs such as bridge financing but risky if you cannot meet this final obligation without refinancing due to insufficient cash reserves and/or other financial resources available at that time.
Advantages & Disadvantages
The main advantage of taking out a balloon loan is that it can provide much-needed capital relatively quickly while allowing you more flexibility in terms of repayment amounts and frequency compared with other types of finance due to smaller monthly installments being paid back over longer periods; however, these advantages come with significant drawbacks too including increased risk associated with potential changes in market conditions preventing refinancing at maturity and higher overall costs incurred through interest charges accruing over extended timeframes even though monthly payments remain low. Additionally, because lenders tend not to check credit scores closely when approving applicants for this kind of finance agreement (and thus impose no restrictions on how funds are used), borrowers could easily find themselves spending money frivolously rather than investing wisely creating further problems down the line when trying to secure new financing options later on should circumstances change unexpectedly or desired outcomes fail materialize from investments made using initial funding obtained via balloon loans.
