A balloon loan is a loan with a considerable final instalment that can be beneficial under the right circumstances. By adding the loan term, amortization period, and a few other details you can estimate your monthly obligation with a balloon loan. You can even find out how much loan you can afford to borrow. This can be helpful for planning your next business or real estate transaction. Let’s review what this calculator may be used for and how you may use it.
What is a balloon loan?
A balloon loan, or bullet loan, is a type of loan that requires the borrower to make a large payment at the end of the loan term. The final payment is much greater than the monthly payments preceding it. With a balloon loan, the monthly costs are significantly reduced, in exchange for a substantial one-time payment when the loan period ends.
These short-range loans are only administrated for limited term lengths, varying from three to five years. The monthly payments are calculated by dividing the loan amount over a longer term (up to 15 years amortization). The interest is only calculated for the loan period. When the balloon loan ends, you are responsible for the large due that is the remainder of the loan amount.
Balloon loans differ from traditional loans. Traditional loans fully amortize the total cost of borrowing over a term length into equal monthly payments. With a conventional loan, each payment gradually reduces the balance until you have paid back the entire loan. When the term ends there are no additional costs.
If you are considering a balloon loan, it is important to think about how you will make the final balloon payment. Our calculator can help you to understand and prepare for your balloon payment obligations.
What is this calculator for?
The balloon loan calculator is very simple to use. It is designed to help you work out the payments on a balloon loan. You can make your calculations using a monthly payment or the total loan amount you need.
The calculator can also be used as a tool to assess how much credit you may be able to afford. This calculation based on the amount you can allocate towards your monthly payments.
From your results you can see how much of your payments will go towards interest on the balloon loan. You can also view the total of all your monthly payments and the amount that is due when the balloon period ends. Then you can decide if this type of loan fits your circumstances, or if you should consider a loan with a more conservative structure.
What are balloon loans used for?
Balloon loans are very versatile and can be used in many situations. These loans can be utilized as a bridge to alternative financing. Other times they are excellent tools for transactions with a quick turnaround. Here we will review some common uses.
Real Estate: balloon loans can be used to purchase commercial or residential properties. In this case, mortgage obligations can sometimes be calculated using 30-year amortization for the balloon term. These loans are attractive due to their low-interest rates and the low monthly payments. When the loan reaches maturity, the borrower must refinance the remaining contributions (if possible). Otherwise, the remainder of the loan can paid off from the property sale.
Automotive: balloon loans are also standard for car purchases. These loans provide more appealing monthly payments to make a vehicle seem more affordable. However, cars are depreciating assets so the loss in worth can make it difficult to recoup the value for the final payment. Refinancing is often not an option. Borrowers will need to use their savings for the outstanding dues.
Business financing: entrepreneurs can also find value in balloon loans for business purchases or start-up financing. New businesses tend to start with cash flow that is in short supply and with limited credit history. A balloon loan can give the borrower some flexibility with their capital. When the balloon term concludes, the business should have built up enough credit to get refinanced at a reasonable rate. Alternatively, the company may have enough cash flow to repay the loan entirely.
The balloon loan calculator is well adapted to make assessments for each of these scenarios. Let us help you decide if a balloon loan makes sense for your situation!
What happens when the final payment is due?
When considering a balloon loan, it is imperative to have a plan for when your balloon payment is due. There are a few options available for when that time comes. You can sell the asset, refinance the balance, or cover the remainder from your savings.
Sell: If you bought a home, car, or started up a new business, you can sell the asset and apply the proceeds to the loan balance. For this strategy to be effective, the asset must maintain or appreciate in value. The sale must also be timed correctly to meet the payment deadline. Unfortunately, there is no way to predict market conditions with full certainty three to five years in advance, so there is no guarantee on your return.
Refinance: when your balloon loan reaches maturity you may need to get alternative financing for the balance. Some mortgage agreements have a reset clause that will allow the borrower to secure the current market interest rate for the remainder of their amortization period. Other borrowers may be forced to refinance altogether. For this strategy to be effective, you will have to meet the loan qualification criteria. This requires your credit, income, and assets to be in good shape to get a fair offer.
Pay it off: depending on the size of the loan, your savings strategy, and the cash flow you have available, you may be able to quickly pay off the balloon loan balance without selling the asset or acquiring another loan.
It is important to have a backup plan for your balloon loan payment, in case things don’t work out as expected. It is possible for market conditions to fluctuate or for your income to change. These factors could affect your loan repayment or refinancing. You should consider all the benefits and risks of the balloon loan and consider a practical payoff strategy before deciding if this loan is right for you.
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How to use the calculator
The balloon loan calculator has two parts: an information intake, and integrated results. For an accurate report to be generated the system requires some basic loan information. Let’s review this together.
Step 1: You must first decide if you want to find out the monthly payments on a balloon loan or what loan amount is within your means. You can make this selection beside ‘Calculate’ on the sixth line of the calculator.
If you know exactly how much you need to borrow, you should calculate your payment. If you want to find out how much you can afford, opt for the loan amount.
Step 2: Depending on your previous selection you may either add a monthly payment on the first line or include the loan amount you need on the second line.
Step 3: Identify an interest rate for the loan on the third line of the calculator. The interest rate will vary depending on the creditor administering the loan. The loan amount, the purpose of the loan, and your credit score can affect the rate you get.
Step 4: On the fourth line of the calculator using the drop-down menu pick a loan term between three or five years. This is the time you will have the loan before making your final balloon payment.
Step 5: Then, on the fifth line of the calculator using the drop-down menu decide on an amortization period. Your loan will be divided over the number of years selected to establish a monthly payment until the maturity of your balloon term.
Step 6: Proceed to your results.
Your balloon loan results
Once your loan information has been added to the calculator, the system will generate your results. You can view various smart prompts, graphs, and tables regarding balloon loan outcomes.
Next to the inputs is a smart summary of the total interest that will be paid on the loan. Here you can also see the total of all your monthly payments over the term length and the final balloon payment amount. This is an excellent reference to get an idea of what your payments will be.
Below the inputs is a smart prompt that will specify the figure you calculated for. If you were trying to figure your monthly payment, like this instance, the prompt would convey your monthly obligation and the months in the term. Please view the next image for an example of a total loan calculation, or continue reading for an analysis of the first integrated graph.
The first tab, balances for a loan, shows a chart outlining your total loan balance and the payments for the balloon loan term. At the end of the period, either 36 months or 60 months, you can view the outstanding amount. You may hold your mouse over any point on the line graph to get an exact figure of the month and loan balance at that time.
The example above provides a smart prompt of a total loan calculation. In this instance, the borrower could afford a monthly payment of $500 to get a loan of $72,403.
The next tab, payment schedule, provides an itemized summary of all the payments throughout the loan term. You may scroll up or down to see more information and click on any row to highlight the payments. Here you can see the principal and interest breakdown, and total loan balance. Looking closely, the last payment in the schedule distinctly shows the outstanding balloon payment.