How it works
A balloon loan trades smaller monthly payments for a large lump sum at the end, and this calculator shows both halves of that trade honestly. During the term you pay only enough to cover interest and chip away at part of the principal, so the monthly figure is lower than a fully-amortising loan on the same amount. But the unpaid balance does not disappear — it waits, and at the end of the term the entire balloon amount falls due at once. The calculator computes the reduced monthly payment from the loan, rate, term and balloon, then totals what you actually repay including that final lump. The appeal is cash flow: lower payments now. The danger is the assumption behind it — that you will be able to refinance or pay the balloon when it arrives. Borrowers who cannot are forced to roll it into a new loan at whatever rate prevails, or worse. Use the tool to see the true total cost, and treat the monthly saving as borrowed against a bill you have already agreed to pay. A balloon is a reasonable tool only when you have a credible plan for the lump sum.
Formula
Monthly payment amortises (loan - balloon) plus interest on the balloon, which falls due at term end
Tips
- The monthly payment is lower, but the balloon is a bill you have already agreed to pay.
- Have a credible plan for the lump sum before you sign — refinancing is not guaranteed.
- Total cost is often higher than a normal loan on the same amount.
- A balloon suits cash flow now against money you are confident of later.
- Compare the total repaid against a fully-amortising loan, not just the monthly figure.
Frequently asked questions
- What is a balloon payment?
- A large lump sum due at the end of a loan whose monthly payments were kept low by not fully paying down the principal. During the term you cover interest and part of the balance; the unpaid remainder — the balloon — falls due all at once when the term ends.
- How is a balloon loan payment calculated?
- The monthly payment covers interest on the full balance plus enough principal to leave exactly the balloon amount at term end. Because less principal is paid along the way, the monthly figure is lower than a fully-amortising loan — and the calculator shows both the payment and the lump sum.
- Is a balloon loan a good idea?
- Only with a credible plan for the lump sum — money you are certain of, or an asset you will sell. Without one, you are betting you can refinance at a future rate you do not control. The lower monthly payment is borrowed against a bill you have already agreed to pay.
- Why is the monthly payment lower on a balloon loan?
- Because you are not paying off the whole balance during the term — part of it is deferred into the balloon. Less principal repaid each month means a smaller payment, but the deferred part does not vanish; it waits and falls due at the end.
- What happens if I cannot pay the balloon?
- You must refinance into a new loan at whatever rate then prevails, sell the asset, or default. This is the central risk of balloon structures: the assumption that refinancing will be available on acceptable terms is exactly what fails in a credit crunch.