Financial Glossary: Balloon Payment


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Balloon Payment

Balloon Payment

A large extra payment that may be charged at the end of a loan or lease.

With a balloon loan, a balloon payment is paid back when the loan comes to its contractual maturity, e.g. reaches the deadline set to repayment at the time the loan was granted, representing the full loan amount (also called principal). Periodic Interest payments are generally made throughout the life of the loan.Balloon payments or bullet payments are common for certain types of Debt. Most bonds, for example, are non-amortizing instruments where the Coupon payments cover Interest only, and the full amount of the Bond's face value is paid at final maturity.

Bullet payments introduce a certain amount of Risk for the borrower and the lender. In many cases, the intention of the borrower is to refinance the amount of the balloon payment at the final Maturity Date. Refinancing Risk exists at this point, since it is possible that at the time of payment, the borrower may not be able to refinance the loan; the borrower faces the Risk of having insufficient liquid funds, and the lender faces the Risk that the payment may be delayed.

Posted by Uniglobal

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