Short answer: a balloon payment is a large, one-time payment at the end of a loan. The payments before it are lower because they do not pay the loan off over the term (CFPB). On a closed-end loan, the disclosure must show the number, amounts and timing of the payments (12 CFR 1026.18(g)), so a balloon shows up there as one payment much larger than the others. Before you sign, make sure you know how you will pay it.
Where to find it in your disclosure
- Payment schedule: the number, amounts and timing of the payments (12 CFR 1026.18(g)). Look for a last payment that is bigger than the rest.
- Total of payments: the amount you will have paid when you have made all scheduled payments, balloon included (12 CFR 1026.18(h)).
- More on each box: how to read a loan disclosure.
For mortgages, the CFPB describes a balloon payment as generally more than two times the loan's average monthly payment, often a large part of the whole loan amount (CFPB).
Worked example: balloon vs fully amortizing
Example, not a quote: $10,000.00 at 12% for 36 months, no fees. Loan B's payments are figured as if the loan ran 60 months, and what is left is due at month 36. Our calculation, payments rounded to the cent:
| Loan | Payment schedule | Total of payments | Interest |
|---|---|---|---|
| A: fully amortizing, 36 months | 36 payments of $332.14 | $11,957.04 | $1,957.04 |
| B: balloon, 36 months | 35 payments of $222.44, then 1 payment of $4,948.11 | $12,733.51 | $2,733.51 |
Loan B's regular payment is $109.70 a month lower, but the last payment is $4,948.11: the regular $222.44 plus a balloon of $4,725.67, about 21 times the regular payment. To have the balloon ready from your own money, you would need to set aside about $131.27 a month, more than the $109.70 you save each month. Both loans have the same rate, so the APR is the same; the balloon loan costs more interest because you owe more for longer (monthly payment formula).
The refinance risk
If you cannot pay the balloon, you may plan to refinance it. The CFPB warns, for balloon mortgages, that if your financial condition declines you might not be able to (CFPB). Even if you can, it adds cost: in the example, refinancing the $4,725.67 balloon at the same 12% over 24 months is $222.45 a month and $613.13 more in interest, for $3,346.64 in total interest on the original $10,000.00. A new loan's rate and fees can differ from the old one's (refinancing a personal loan).
Before you sign a loan with a balloon
- Ask the lender: is any payment larger than the others, how much, and when is it due?
- Write down where the money for the balloon will come from, and whether that will still be true on the due date.
- Ask whether you can pay extra early without a penalty, to shrink the balloon; see prepayment penalties.
- Compare it with a fully amortizing offer by APR and total of payments, not only by the monthly payment.
- If the loan is secured by your car, a lender may be able to repossess it if you default (FTC); see vehicle title loan risks.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.