Balloon Payment
A large lump-sum payment due at the end of a financing agreement.
Detailed Description
Balloon Payment
What is a balloon payment?
A balloon payment is a large final payment due at the end of a loan term, significantly larger than the preceding periodic payments.
What are the advantages of balloon payments?
The primary advantages include lower monthly payments during the loan term and potentially lower interest rates compared to traditional loans.
What are the risks associated with balloon payments?
The main risks include financial strain when the balloon payment is due, potential inability to refinance, and the risk of foreclosure.
How do balloon payments differ from fully amortized loans?
Balloon payments result in a much larger final payment compared to fully amortized loans, which require equal payments throughout the term.
Are there regulations regarding balloon payments?
Yes, regulations vary by jurisdiction, and in the U.S., the Dodd-Frank Act introduced restrictions on balloon loans to protect consumers.