What are two disadvantages of the balloon payment?
Disadvantages of Balloon Payments
While balloon mortgages offer lower initial monthly payments, the risk lies in the large lump sum due at the end of the term. If you're unable to refinance or sell the property to cover the balloon payment, you may find yourself in financial strain or even risk foreclosure.
The most significant risk of a balloon mortgage is foreclosure if the borrower can't make the balloon payment at the end of the term. Foreclosure can result in the loss of the home, emotional distress, and impact the borrower's credit negatively, generally for seven years.
But the disadvantages often outweigh the positives, as there is no guarantee that the borrower will be able to refinance at that same lower rate—or will be able to refinance the loan at all. As a result, the borrower may have no choice but to default on the loan.
Balloon loans can be attractive to short-term borrowers because they typically carry lower interest rates than loans with longer terms. However, the borrower must be aware of refinancing risks as there's a possibility the loan may reset at a higher interest rate.
Disadvantage 3: Limited Lifespan
Balloons have a limited lifespan. Over time, they deflate, and the once festive atmosphere can turn lacklustre. Something to consider for events that span more than a day.
- Lower monthly repayments. ...
- Fixed cost. ...
- Potential for positive equity. ...
- You get to own your vehicle! ...
- Usage restrictions. ...
- Not ideal for those with lower credit scores. ...
- Not optional for lease agreements. ...
- Expensive final payment.
If you have adequate savings or financial resources, you can pay off a balloon payment in full. How can refinancing help with a balloon payment? Refinancing involves taking out a new loan to pay off the balloon payment of the existing loan. The new loan typically comes with smaller, more manageable monthly payments.
Balloon mortgages should come with a lower interest rate than either fixed-rate or adjustable-rate mortgages, making them a cheaper loan for the right consumers. Those consumers who plan to live in a home for only a short period of time, might do well to take out a balloon mortgage.
You'll Need to Repay or Finance a Large Payment
If you don't have the money on hand to make the balloon payment, you'll have to find it—possibly by refinancing your loan or taking out another loan. House flippers sometimes use balloon mortgages because they plan to sell the home before the balloon payment comes due.
What happens if I can't pay my balloon payment?
You will end up in foreclosure for inability to pay that last balloon payment. Sometimes, you can refinance your home before the balloon hits, to pay it off, and stay current on your loan. But you may have no idea if, when that time comes, you will have the credit or the equity in the property to do that.
Borrowers may plan to refinance or sell the home to avoid making that large final payment at the end of the term. Of course, if you have the cash, you can pay off a balloon mortgage early or when the balloon payment comes due.
Refinance: If you don't have enough cash to make the balloon payment, you can see if you'll qualify for a refinance. To qualify, you'll need an adequate credit score (at least 620), proof of steady income and at least 20 percent equity in your home.
If you're unable to pay the amount in full by the end of your finance term, you can opt for refinancing. This is simply a matter of taking out another loan with new terms and interest rates to pay the balloon amount. With the balloon payment settled, you'll make monthly payments for your new loan.
Generally, a balloon payment is more than two times the loan's average monthly payment, and often it can be tens of thousands of dollars. Most balloon loans require one large payment that pays off your remaining balance at the end of the loan term.
Negotiating the final balloon payment is sometimes possible, depending on the lender's policies. Successful negotiation can prevent damage to one's credit score; however, failure to agree on terms could lead to negative implications for credit history.
A balloon payment may be suitable for borrowers who are in urgent need of a car but are unprepared to deal with a large monthly payment. In such cases, the borrower will probably pay a higher interest rate than is charged on a conventional car loan.
With a balloon payment (or residual), you'll pay instalments for a percentage of the loan amount over a term, and at the end of that term, you agree to pay another amount over the remaining term.
You pay more interest on your loan when you have a balloon payment. That's because you're effectively paying interest on the value of the residual value or balloon payment for the entire term of the loan. A key benefit of having a RV or balloon payment is lower monthly repayments.
- Lenders might not refinance your balloon loan.
- Balloon loans are riskier for commercial real estate investment.
- The price of the loan might be higher in the long run.
- The burden at the end can be great.
Should I opt for a balloon payment?
The primary advantage of including a balloon payment in your car loan is that it makes the weekly, fortnightly, or monthly loan repayments lower. This gives you the benefit of: Making it easier to fit your loan within your monthly budget and household expenses.
Should I make the balloon payment? If you want to keep the car, then you should consider making the balloon payment. This can be done by making a one-off payment to the lender or by refinancing, which could take the form of a Hire Purchase arrangement.
If you're able to, you can simply pay the balloon in full, once-off. You can even settle your entire financed amount and end the contract early.
A balloon payment can be part of a loan with both fixed or variable interest rates, and is commonly repaid over a period of 5-7 years for commercial loans. Balloon payments are far more common in commercial lending than in consumer lending.
If your car is worth less than the balloon payment value, it can be better to hand the car back to the dealer as you'd lose money and can find similar models for less. But if your PCP car is worth more than the value of the balloon payment, you could be better off paying it in full or refinancing it.
