London Loans Bank Logo
  • info@londonloansbank.comMail us

balloon loan
  • Emma Parker
  • October 8, 2022

In some situations, one needs financial assistance urgently. For example, if you want to invest in a property but do not share the required credit score or income, a balloon loan can help. You may be familiar with spreading the costs of a loan for 5-10 years. But are you familiar with amortization until 30 years?

Balloon loans provide you with that opportunity.

Balloon Loan: Rationalize Your Dream Now; Pay Later

A balloon loan is a loan that can loan for an amount of up to 30 years. It is not an amortized loan constituting a fixed payment for months and closure. Generally, these are short-term loans for 5-7 years, ideal for borrowers with urgent requirements.

It works differently from other traditional loans involving regular interest payments. It is like a conventional 30-year mortgage where the borrower pays only a part of the principal balance in 5-7 years. The lender, in this case, provides the flexibility to pay off the remaining balance (Principal+ interest) by the loan term ends.

Some lenders provide a reset option post with the 5-year loan term. In this, one can have a revised payment schedule basing the current interest rates and the amortized sum. If it does not have any reset option, the lender expects the borrower to refinance it to better interest rates or pay a balloon payment. A balloon payment is a part that a borrower must pay within 5 years.

Why Would I like to get a Balloon Loans?

Here are some reasons that you may benefit from a balloon loan:

  • You have a good credit score
  • Low but stable income
  • You need good financial flexibility now and low savings
  • Want funds at low interest
  • You wish to spread the principal amount
  • Lower the monthly amount by paying a lumpsum amount
  • maintain other priorities along with saving for payment in 5 years

How is a Balloon Loan different from a Payday Loan?

You must be familiar with a 12-month payday loans that you apply with direct lenders for urgent requirements. In this, you pay a fixed amount as repayment for 12 months. The tenure help spread the costs of the loan, so you exercise more flexibility as an employed individual.

Similarly, balloon loans help lower your repayment liabilities with every big payment you make towards the loan. However, unlike payday loans, you do not stick to a regular and fixed payment schedule; instead, you pay only the principal amount.

You cannot delay the payment for the following years; the balloon loan provides you with freedom. In this, you pay the principal amount for the short-term, and the highest cost-plus interest by the loan term ends after 5 years.

However, limited payments in due course of time leave one with a significant amount by the term’s end. And refinance is sometimes not possible; in that case, one has the option of paying the loan by selling an asset or extending the loan term.

In What Situations Can You Use Balloon Loans?

There could be multiple life scenarios where you would like to delay the loan repayments for good. Here are some scenarios that you could consider leveraging balloon loan in:

1. Fetching Affordable Mortgage Quote

If you are someone seeking an interest-only mortgage and deferring the principal amount for a good term, you may benefit from balloon loans.

It allows one to defer the principal payment for up to 5-10 years. Interest payments on a mortgage loan are pretty high. Individuals seek to split the interest and principal payments or pay either initially.

However, you must ensure enough interest payment and can pay the large or balloon principal amount by the loan term ends. After the low payment period ends, the lender may ask to pay the remaining amortized amount. One must pay for that. It is ideal for homeowners who wish to live in the house for over 6-7 years by splitting the mortgage costs and interest payments.

2. Businesses may benefit by Bridging the Payment Gap

In the mid of waiting for invoice clearance and need to update the employees’ requirements and fund other costs, and can benefit from a balloon loan.

It acts as a bridge to rationalize the pending tasks instead of waiting endlessly until payment clearance.

Although, one can explore options regarding small loans for bad credit from a direct lender for a short term. But here, you have to maintain regular payments. However, these loans eliminate any uncertainty, and you could consolidate these to boost the credit profile and fetch better interest rates.

However, balloon loans help businesses to move into new offices before selling the existing ones. The advantage of the balloon payment is it allows enough flexibility and time to sell off the existing property and pay off the loan by selling it. You can also sell a part of the property as equity to make the half-balloon payment. It would help decrease the interest on the loan.

What if the value of the property never appreciates over time?

What if the total marketing costs curb all the property’s profit gains? 

In that case, you may not benefit much from a balloon loan.

However, you must ensure sufficient revenue back up, and the lender may ask for expected revenue growth before approving the balloon loan.

3. Auto Industry

A Balloon loan is not very standard in the auto industry as car finance, and car loan is secured. However, the benefit of a balloon loan here is that you can reduce the interest rate over the loan by paying a reasonable lump sum payment.

However, identify the means and probability of income rise until the next due payment term. If you believe you can multiply your income sources or get a hike within that framework, a balloon loan could help you.

It is essential to know that balloon loans only help spread the payments; they are not affordable. If you cannot decipher a substantial rise in income anytime soon, you must instead rely on options like a 12-month payday loan provided by direct lenders in the UK.

In this, lenders only provide you loans if you share sufficient affordability capability. And unlike balloon loans, where you must pay the amount in any way to the lender, payday loan lenders cannot force a person to do so.

However, you can borrow only a limited or needful amount to bridge a small payment gap in payday loans; regular payments make the loan affordable. You could use it to cover a small down payment that you need for a car.

Is Balloon Loans Advantageous?

A balloon loan is ideal only for borrowers with high revenue and income numbers. An average pay would not suffice to qualify for these loans. The reason is – it allows one freedom to split payments into affordable halves to manage ends. If you have sound, predictable finances and need urgent money, you can apply the following:

Here are some pros and cons of balloon loans:

PROS of balloon loans

  • Low or no initial payments
  • Affordable short-term capital
  • Help bridge the financial gap
  • You can refinance interest rates for lower terms
  • The person does not feel burdened by interest payments with an interest-only loan

CONS of balloon loans

  • The loan enters the default stage if the borrower cannot convince the lender to refinance it.
  • If the property rates fall and the borrower gets lower money than expected, he may not have enough payment to pay the balloon loan.
  • Risky payment schedule

Take Away

Balloon loans are a great way to close opportunities in time. It is best for those with a high income and revenue brackets and asset security. Define your goals and requirement for clearing payments within the expected framework. Analyze the futuristic value of the property and decide right.

Leave a comment

Your email address will not be published. Required fields are marked *