What a balloon loan is
A balloon loan does not fully pay off the principal through its regular payments. Instead, a large final payment, the balloon, settles the remaining balance at the end of the term. Car finance plans with a guaranteed future value, some business equipment loans and some commercial mortgages are built this way.
The appeal is a lower monthly payment. The cost is that a large sum is still owed at the end, and it keeps accruing interest the whole time.
How the payment is calculated
With a loan amount P, a balloon B, a monthly rate r and n payments, the regular payment covers interest on the full balance and pays down everything except the balloon:
Payment = (P − B ÷ (1 + r)ⁿ) × r ÷ (1 − (1 + r)⁻ⁿ)
The calculator compares this with a standard fully amortizing loan of the same amount, rate and term, so you can see the trade-off.
Worked example
A $30,000 loan at 7% APR over 60 months, with a 30% balloon:
| Result | With balloon | Without balloon |
|---|---|---|
| Monthly payment | $468.33 | $594.04 |
| Final balloon | $9,000 | none |
| Total interest | $7,100 | $5,642 |
The monthly payment is about $126 lower, but the total interest is about $1,457 higher, and $9,000 is due with the last payment.
Options at the end of the term
- Pay the balloon from savings.
- Refinance the balloon into a new loan, at whatever rate is available then.
- Sell the asset and use the proceeds, which works if it is worth more than the balloon.
- For some car finance plans, return the vehicle instead of paying, subject to mileage and condition terms.
The risk is that rates rise, your credit worsens, or the asset loses more value than expected, leaving you short when the balloon is due.
When it can make sense
A balloon loan can suit a business that expects higher cash flow later, or a buyer who plans to sell or trade in the asset before the end. It is risky when the lower payment is the only way to afford the purchase.
The calculator excludes fees, taxes and insurance. Compare offers using the APR disclosed under the Truth in Lending Act, which includes most finance charges.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.