Is A Balloon Payment Good Or Bad Decision: Best Reviews From Experts

You might have all gone through that phase when the price tag on your dream car is really a stretch on your budget. After calculating your monthly sums, you realise that affording the regular repayment has turned into a challenge for you. Then what do you do in such a case? Well, you can enquire about another option — the availability of balloon or residual payment at the end of a financial term. In this post, we shall explain basic concepts such as what is a balloon payment, the meaning of ballooning, and is a balloon payment good or bad for you. After reading the blog, a prospective borrower will be able to know whether he should go for this option and the ideal conditions under which he can one opt for such a procedure.

Balloon Payment Formula

Opting for a Balloon Payment? What does it actually mean?

A balloon payment is a fraction of your entire loan payment where you pay a lump sum amount at the end of your car or equipment loan term. This means you make reduced payments throughout your loan tenure, thus rendering this option quite advantageous for entrepreneurs. Businessmen facing a cash crunch in the beginning but expecting liquidity to move at a faster pace in the near future can immensely benefit from this contract.

Monthly Interest Payment

When you require a vehicle for your business, you can now maintain a steady cash flow throughout the entire loan period. With reduced principal payments you are able to grow your venture and invest in your company with ease.

The real cost of Balloon Payment. Are there any hidden costs?

Let us illustrate this with the help of a small example. Assume that the price of a car or equipment you are planning to buy is AUD 30,000. Now if your lender quotes a balloon payment of 30% at the end of a five-year term, you shall owe him AUD 9,000 by the time your 60 months are over. By using an online calculator, we found out that your monthly payment in this case turns out to be AUD 546 (assuming an interest rate of 6.5%). Now, if we consider no balloon amount at the end of term, your monthly payment amounts to AUD 678.

To summarise:

Table for Balloon Payment Method

So is a Balloon Payment the right option for you?

As seen above, going for ballooning does result in higher costs in the long term. Therefore, a natural question arises — why should we even choose this method? Well, before answering this question, let us guide you through the various pros and cons of a balloon payment.

Read more about various Pros and Cons of a Balloon Payment given by Financial Experts on One 80 Financial Services Blog.

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