balloon loan
Definition
A long-term loan, often a mortgage, that has one large payment (the balloon payment) due upon maturity. A balloon loan will often have the advantage of very low interest payments, thus requiring very little capital outlay during the life of the loan. Since most of the repayment is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the available capital during the life of the loan. The major problem with such a loan is that the borrower needs to be self-disciplined in preparing for the large single payment, since interim payments are not being made. Balloon loans are often undertaken when refinancing or when a major cash flow event is anticipated. also called balloon note or bullet loan.
Use balloon loan in a sentence
“ One should be cautious of a balloon loan as it requires a large payment at the end of the loan period. ”
“ The mortgage lender was offering a balloon loan that provided for a 2.25% fixed rate however required a balloon payment of the outstanding balance at the end of year seven. ”
“ I will usually advise against young couples getting balloon loans for their homes because they have so many distractions in those early years, and the term sneaks up on them very quickly. ”
