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What is a Balloon Payment?

admin2 months ago07 mins

A balloon payment is a type of loan repayment where there is a large amount paid at the end and smaller amounts paid in monthly installments during the term of the loan. While regular loans distribute both the principal amount and the interest into equal monthly installments, the balloon payment could be the principal or interest while the rest is paid in installments. As a consequence, the monthly installment for loans with these types of repayments is lower than those of regular loans.

Which loans Allow Balloon Payments?

Balloon payments can be used either for car loans, business loans, debt refinancing,

Car Loans

According to recent data, for every five vehicles bought on loan in South Africa, one of them is paid through the balloon payment arrangement. For this reason, motor vehicle dealers, creditors, and banks offer this payment option to their customers. Because vehicles are assets that can be resold, if necessary balloon payments can be settled by selling the vehicle.

Business Loan

Before startups break even, they have to go through a period in which heavy investment is required to stay afloat. By providing business loans that have a balloon payment, loaners give businesses a chance to spark growth during the grace period. With good planning, a business can schedule the balloon payment to a convenient time in the lifecycle of the business.

Debt Refinancing

Balloon payment loans can also at times be used in debt refinancing. In South Africa, you can opt for debt counseling in case you find that you are unable to make your monthly debt payments. A debt counselor can suggest using loans with balloon payments for refinancing while you are under debt review.

What are the Best Ways to Opt-Out of Balloon Payments?

Balloon payments are good repayment options because it gives you time to plan for a large future payment. However, sometimes you may not be ready to settle the balloon repayment when it is due. In such cases, you can explore one of the following options:

Debt Refinancing

Within 60 days of the end of your loan term, but before it ends, you can apply for a debt refinancing with most South African creditors and banks. With a debt refinance, you can get an extended period to pay the debt rather than the balloon payment which is usually a big sum.

Selling Your Car

As you anticipate the end of your balloon payment loan’s term, you could sell your car and get the money you need to settle the repayment. Depending on the demand for a second-hand version of your car’s model, you can get it sold at an auction, to resellers, or privately through your own advertising efforts.

Trade-In

You can also trade in your car if its value covers the full amount of the balloon payment. Depending on the terms and conditions of your loaner or the trade-in agreement, you may be able to get the shortfall back.

What are the Advantages of a Balloon Payment?

Balloon payments give borrowers time before they have to settle it during which they can plan how they will do so.
Startups with balloon payments to pay for their business loans get the opportunity to break even before paying the bulky part of their loan.
Loans with balloon payments are a good option in debt refinancing because they lessen the monthly installment on the outstanding loan.
Balloon payments are also less burdensome to an individual’s monthly expenses than other loans.
Settling balloon payments by trading in or selling an old car is a good way to upgrade especially if you need a new car loan.

What are the Disadvantages of a Balloon Payment?

When balloon payments are due, they are a big financial setback.
In general, the longer the term of the loan the lesser the amount of the balloon payment.

Conclusion

Loans with balloon payments are a good option for anyone who has done the planning and figured that they are able to settle the balloon payment when it is due. By considering its advantages and disadvantages, you can find out if it is a good option for you.

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