What is a balloon payment?

A balloon payment is a large one-time payment that becomes due at the end of a loan's term if the entire loan amount has not been paid off through regular installments. A balloon loan keeps monthly payments low for a short period, with the remaining balance being paid in a lump sum at the end of the term.

How is a balloon payment calculated?

A balloon payment loan is a loan in which the repayment amounts are based on a schedule that extends beyond the term of the loan, for example 30 years. The balloon payment is the remaining amount outstanding at the end of the short-term loan period. This amount is calculated from the original borrowed amount plus interest, minus any repayments already made. For an interest-only loan, the balloon payment would be the entire borrowed amount.

What happens if you can't afford to pay your balloon payment?

A balloon payment loan does not automatically convert to a regular repayment plan. If you are unable to make the balloon payment, then you have the option of converting the remaining balance into a new loan or selling assets and using the proceeds to pay it off. Should both options fail, there is a risk of defaulting on your loan. Therefore, it is advisable to develop an exit strategy six to twelve months before the maturity date.

Is a balloon payment loan a good choice?

It can be a good option for certain borrowers. It is suitable for those who plan to sell the property or refinance before the end of the term, or for those who need short-term capital. The risk lies in the large lump sum payment. If you are unable to refinance the loan, liquidate assets, or save up funds to repay, the balloon payment can lead to default. It is suitable for borrowers with stable income and good credit history who have a clear plan to handle the balloon payment.

What is the difference between a balloon payment loan and a fully amortizing loan?

A fully amortizing loan is paid off in full through regular payments so there are no additional payments required at the end of the term. With a construction loan only portions of the amount are repaid during the term leaving a large balance remaining. So, while construction loans have lower monthly payments they do come with a large balloon payment due at the end of the term. A fully amortizing loan has all costs spread out evenly and paid off so there are no unexpected repayments required at the end of the term.

Balloon Payment Calculator

Your balloon loan

Balloon loan structure

Pick how the loan is structured. Each type sizes the regular payment a different way.

Amortized (payment on a longer schedule)

Interest-only

Target balloon (solve the payment)

Loan amount

Interest rate

Loan term (balloon due)

Amortization period

years

Payment frequency

Dropdown list for Compounding Frequency

Regular payment

Balloon payment

Show a rate sensitivity band

See the regular payment if your interest rate landed a little lower or higher.

Balloon payment due at the end

Regular payment: $
Total of regular payments: $
Total interest: $

Total cost (payments + balloon): $
If it were interest-only: $

When the term ends you owe a balloon of $188,263.18, on top of the $1,330.6 you pay each period along the way.

A balloon is a large sum owed all at once. Plan ahead to refinance, sell the asset, or save for it before the term ends, or you risk defaulting.

Charts and schedule

Show the principal and interest split

Split everything you repay into the original loan and the interest on top.

Show the balance-over-time chart

Watch the balance fall toward the balloon due at the end of the term.

Show the amortization schedule

A full year-by-year table of interest, principal, and remaining balance.

Where your money goes ($)

Everything you repay -- the regular payments plus the balloon -- splits into the original loan amount and the interest charged on top of it.

Year-by-year amortization schedule (the final balance is the balloon)
Year	Interest ($)	Principal ($)	Ending balance ($)
1	13,935.64	2,031.62	197,968.38
2	13,788.77	2,178.49	195,789.89
3	13,631.29	2,335.97	193,453.93
4	13,462.42	2,504.84	190,949.09
5	13,281.35	2,685.91	188,263.18

A balloon payment is a large single sum that becomes due at the end of a loan's term. With a balloon loan, regular payments are kept low during a short term, with the remaining balance of debt being paid off in one lump sum at the end of the term. This final large payment is the balloon payment. This calculator shows how much will be due each period over the life of the loan as well as the amount of the balloon payment at the end of the term.

Balloon loans typically have three different structures. In an amortizing balloon loan the payments are calculated based on a longer amortization period (e.g., 30 years), while the loan actually matures earlier and the remaining balance becomes the balloon payment. In a zero-interest balloon loan only interest is paid in each payment, with the entire principal amount remaining until the end of the term. In a target-balloon loan a desired lump sum at the end of the term can be set, and the tool will calculate what payments are required to achieve that goal.

Balloon payment calculation:

First the amount of the regular payment is calculated. In an amortized balloon loan this corresponds to the rate of a normal loan which is repaid over a longer repayment period. In this repayment plan, the capital only falls slowly so that at the end of a short term there is still a large part of the loan outstanding. This remaining amount is the balloon payment.

The remaining amount after several installments corresponds to the loan amount plus interest minus the present value of the already paid installments.

B = P\,(1 + i)^{t} - M \times \dfrac{(1 + i)^{t} - 1}{i}

In this formula B is the balloon amount, P is the loan principal, i is the interest rate per payment period, M is the regular payment amount and t is the number of payments made up to the date of the balloon payment. The regular payment amount M itself is calculated from a standard formula for loans with longer repayment schedules.

M = P \times \dfrac{i\,(1 + i)^{n}}{(1 + i)^{n} - 1}

In this case n is the number of payment periods in the full amortization period and not the number of payments for a short term loan commitment. For a monthly payment loan, the rate per payment period is the annual interest rate divided by twelve and the number of payment periods is the number of years times twelve.

Example calculation:

Let's take a loan of $200,000 at an interest rate of 7%. The payments are calculated based on a period of 30 years but the loan is due in 7 years with a balloon payment to be made while monthly installments are being paid. The monthly interest rate is 0.5833% and the repayment is the amount required to fully pay off the loan within 360 months.

M = 200{,}000 \times \dfrac{0.005833\,(1.005833)^{360}}{(1.005833)^{360} - 1} \approx 1{,}330.60

The remaining balance after 84 monthly installments is equivalent to the balloon payment.

B = 200{,}000\,(1.005833)^{84} - 1{,}330.60 \times \dfrac{(1.005833)^{84} - 1}{0.005833} \approx 182{,}295

So for seven years you will pay about $1,330.60 a month and then have a balloon payment of around $182,295 left to pay. The table below shows the individual symbols in this example and their corresponding values.

Symbol	Meaning	Example
P	Amount borrowed	200,000
i	Rate per period	0.5833 percent a month
n	Payments in the amortization schedule	360
t	Payments before the balloon	84
M	Regular payment	1,330.60
B	Balloon payment	182,295

Variants: Only interest payment or fixing a target amount for the balloon rate.

Balloon loans with exclusive interest payments are more simple to structure. As each payment covers only the interest, the principal balance does not reduce continuously and the balloon amount is equivalent to the entire loan amount. The repayment rate is determined by multiplying the loan amount by the interest rate for that period of time. This method is common in short-term business loans, bridge loans, and hard money loans with a term between one and three years.

In balloon loans with a target amount determination, the borrower determines what amount he wants to have left at the end of the term. A calculation calculator then determines the corresponding fixed rate level so that the final remaining balance corresponds exactly to this amount. If the goal is set to zero, it's an ordinary loan with full amortization without a balloon payment. If the target equals the loan amount, the result will be the same as for a balloon loan with only interest payments.

Balloon loans are used for:

Balloon financing is most commonly found in the commercial real estate arena. It's often used with conventional commercial mortgages, bridge loans and hard money loans to reduce payments during a period when a business is being remodeled, expanded or sold. There are also balloon mortgages for residential properties that typically have terms of five to 10 years. They're suitable for buyers who plan to move out or refinance before the balloon financing comes due.

A 15-year balloon loan is a common option for a second mortgage. A "piggyback" loan, in which a first mortgage is combined with a smaller second mortgage to avoid private mortgage insurance, is one example. Car dealers sometimes offer balloon auto loans to make monthly payments appear lower, but because cars depreciate over time, the final balloon payment can exceed the actual value of the vehicle.

Compromises and situations at the end of the term:

The appeal of this type of loan is the low monthly payments, but the risk is that you will have to pay a large sum all at once when the balloon payment comes due. Because there's no automatic switch to regular repayment terms when the balloon period ends, it's important to take steps ahead of time. Possible strategies for paying off the balance include using savings, refinancing into another loan or selling assets to cover the remaining amount.

Each of these strategies has its drawbacks. Refinancing depends on your credit and current interest rates, neither of which are guaranteed in advance. Selling assets depends on whether their value holds up, which many homeowners found impossible during economic downturns like the one we saw in 2008. Even trading in a car can be problematic. The Truth-in-Lending Act requires lenders to verify that you're able to make your balloon payment, but it's your responsibility to prepare for this eventuality. To arrange a refinance or sale, start six to twelve months before the end of your loan term.

This tool is for educational and planning purposes only and does not constitute financial advice. Actual balloon loans may include fees, prepayment penalties, and interest rate adjustments that can affect your repayment amounts and the size of the balloon payment. Additionally, actual loan terms will depend on your creditworthiness and the lender's requirements. Please review the loan agreement carefully before taking out a loan and consult with a qualified professional.

Frequently asked questions

What is a balloon payment?: A balloon payment is a large one-time payment that becomes due at the end of a loan's term if the entire loan amount has not been paid off through regular installments. A balloon loan keeps monthly payments low for a short period, with the remaining balance being paid in a lump sum at the end of the term.
How is a balloon payment calculated?: A balloon payment loan is a loan in which the repayment amounts are based on a schedule that extends beyond the term of the loan, for example 30 years. The balloon payment is the remaining amount outstanding at the end of the short-term loan period. This amount is calculated from the original borrowed amount plus interest, minus any repayments already made. For an interest-only loan, the balloon payment would be the entire borrowed amount.
What happens if you can't afford to pay your balloon payment?: A balloon payment loan does not automatically convert to a regular repayment plan. If you are unable to make the balloon payment, then you have the option of converting the remaining balance into a new loan or selling assets and using the proceeds to pay it off. Should both options fail, there is a risk of defaulting on your loan. Therefore, it is advisable to develop an exit strategy six to twelve months before the maturity date.
Is a balloon payment loan a good choice?: It can be a good option for certain borrowers. It is suitable for those who plan to sell the property or refinance before the end of the term, or for those who need short-term capital. The risk lies in the large lump sum payment. If you are unable to refinance the loan, liquidate assets, or save up funds to repay, the balloon payment can lead to default. It is suitable for borrowers with stable income and good credit history who have a clear plan to handle the balloon payment.
What is the difference between a balloon payment loan and a fully amortizing loan?: A fully amortizing loan is paid off in full through regular payments so there are no additional payments required at the end of the term. With a construction loan only portions of the amount are repaid during the term leaving a large balance remaining. So, while construction loans have lower monthly payments they do come with a large balloon payment due at the end of the term. A fully amortizing loan has all costs spread out evenly and paid off so there are no unexpected repayments required at the end of the term.

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Disclaimer: This calculator is provided for general informational and educational purposes only. Our calculators are under active development, and results may be inaccurate, incomplete, or unsuitable for your situation. Always verify the figures independently and seek advice from a qualified professional before relying on them. We make no warranties and accept no liability for any loss or decision arising from use of this tool.

References

Investopedia: Balloon Payment
Definition of a balloon payment and how balloon loans are structured.
Consumer Financial Protection Bureau: What is a balloon payment?
Plain-language explanation of balloon payments and the risks for borrowers.
Investopedia: Amortization
How amortized loan payments split between interest and principal over time.