![]() The AMCalc calculator always uses the loan amortization input into the calculator, and ignores the loan term, to find the fixed payment amount. If the loan amortization and loan term inputs are not equal, there will be a balloon payment at the end of the loan. If the number in the loan amortization and loan term fields are equal, there will be a fixed payment throughout the life of the loan and no balloon payment. Remember, I said amortized loans can have a balloon payment. But you may be wondering if the payment is the same for the entire loan, where is the balloon payment? So, “loan amortization” is the number of loan payment periods that are used by the calculator to find a fixed payment amount over the life of the loan. This is due to the cumulative rounding to whole cents during the generation of the schedule. Actually…not quite! Usually the last payment will very slightly from the rest of the payments. The end result is a loan payment schedule that has the same payment amount for every period of the loan. To find a loan’s fixed payment amount, the AMCalc calculator uses the number of periods input into the Loan Amortization field, along with the loan principal, interest rate, start date of the loan, and other calculator inputs. To understand how this type of loan works in regards to balloon payments, we need to define two terms “loan amortization” and “loan term”. Each periodic fixed payment, unlike interest only loans, includes both a portion of the payment that pays down the loan principal and a portion that pays the interest owed for each period. Amortized loans, by definition, are calculated to have the same (fixed) payment amount for every period of the loan. This is probably the more common loan type with a balloon payment. ![]() Amortized Loans with Balloon PaymentsĪnother type of loan that can have a balloon payment is an amortized loan. If you have not read the post on the different interest only loans that AMCalc calculates, I encourage you to do so because it goes into depth on how they are calculated. Since none of the principal is being paid down in these periods, there will be a balloon payment required in order to pay back the loan’s principal at end of the loan. The periods where only interest is paid can be for the full length of the loan, or for a portion of it. ![]() In short, interest only loans have periodic payments that only pay the interest due on the loan’s principal. If you have read my post on interest only loans, you know that interest only loans can result in a balloon payment at the end of the loan. For lenders, loans with balloon payments can help mitigate risk by getting back the loan principal earlier than otherwise. So if the borrower expects to have an influx of cash in the future that can be used pay the balloon payment, this type of loan may suit them. For borrowers, up until the point when the balloon payment comes due, the loan will typically have lower periodic payments than a loan without a balloon payment. Why have a Balloon Payment?įor both lenders and borrowers, there are reasons why a loan with a balloon payment may be beneficial. If that is confusing, read on and hopefully it will become clearer. The loan in question can be one of a few types. While a lot of blogs and articles talk of balloon payments as a type of loan, it is really just a characteristic of a loan. A loan with a balloon payment is sometimes also called a “bullet loan” or “bullet repayment”. Usually, the balloon payment is the last payment on the loan and completely pays off the remaining loan balance in one lump sum. Simply put, a balloon payment is a loan payment that is significantly larger than other periodic payments on the loan. What is a Balloon Payment?įirst, what is meant by the term “balloon payment”? In this post, I will try to sort this confusion out for you and explain some of the different loan payment schedules that AMCalc generates that can have a balloon payment. The confusion is because the Internet is loaded with blogs and articles that use varying terminology for them. It’s not so much that the structure or calculations for them are complex. Loans with balloon payments can be confusing.
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