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When To Use Balloon Loans

Aug 17, 2007
If you are looking for a loan that allows you to borrow a large amount of money over a short amount of time but with low monthly payments, then you should consider getting a balloon loan. Balloon loans can be used to reduce your monthly payments whilst still borrowing the amount of money you require. If you want to know what balloon loans are and when you should use them, then this article can help you to learn more.

What are balloon loans?

Balloon loans are basically loans that are agreed for one term, but are calculated over another term. For example, you might take out a five-year balloon loan, but it is calculated over 15 years. This means the monthly payments are going to be very low. However, at the end of the five-year term, you need to pay off the final balance in one large balloon payment.

Lower payments

The main advantage of a balloon loan is that for the loan term you get extremely low monthly payments. If you are looking to borrow a large amount of money but cannot afford large monthly payments, then a balloon loan might be a good idea. With a balloon loan you can borrow large amounts of money with the advantage of low monthly payments, yet you do not have the extra costs of interest on a loan that lasts 10 or 15 years.

Affording the balloon

Although lower payments are a great idea, you need to remember about the balloon payment at the end of the loan. If you borrow a large amount of money, you will likely have to pay a hefty amount at the end of the term. Although it might seem enticing now to have low payments, it might be very different when you owe 5,000 or more in one payment. Think carefully before applying for a balloon loan about your ability to afford such a large final payment.

Who should consider balloon loans?

Balloon loans are good for people who know their income or monetary situation will greatly improve within the next few years. If you cannot afford large payments right now but know that in 2 or 3 years you will have a lot more money, then a balloon loan could work well for you. However, you do need to be fairly certain that your situation really will improve.

Refinancing

If you come to the end of the loan term and find that you are unable to afford the balloon payment, you might be able to renegotiate the loan terms and pay off the rest of the loan in the normal way. Although terms for this will vary, refinancing at the end of a balloon loan is often possible. However, this will end up costing you more money, so if you are unsure about your ability to afford the balloon loan go for a regular loan instead.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Debt Consolidation Loans and Claim Back Bank Charges
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