A loan that is paid back in level installments on a long-term payment schedule (10-20 years, or even more), and at a predetermined future date (e.g., 3-10 years) since inception, all the outstanding loan balance falls due. This loan amortizes (evenly) like a fixed-rate loan, but at the future date its repayment “balloons”: becomes substantially larger than preceding payments (subject to a higher coupon rate).
Loan and mortgages may be structured with balloon payments when a specific projected future event is expected to generate additional cash flows (potentially enabling a borrower to make the balloon payment on time), or when a borrower expects ability to refinance the loan.
Balloon loans are also referred to as partially amortized loans.
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