Balloon Payment
There are different ways of repaying a loan that one has availed. One commonly adopted way, especially in the commercial segment is the “balloon payment” mode. In such mode of repayment, the interest and part of the principal are repaid in phases during the tenor of the loan and the balance principal amount, which is of sizeable amount is repaid at the end of the tenor. Since, the amount involved is quite high, the term balloon is used.
Difference between balloon payment and bullet payment
In “bullet payment”, only the interest is paid during the tenor of the loan and the total principal amount is repaid on maturity while is “balloon payment”, part of the principal amount is repaid during the tenor and the remaining principal amount is repaid on maturity.
Advantages of Balloon Payment
- Generally, the rate of interest asked by the lender is lower when this mode of repayment is opted, so the eligibility increases
- It is beneficial for those who are not cash rich in the short term, but expect a substantial cash inflow after that.
- If one is having lot of liabilities at present, one may defer his repayment schedule by opting for this mode of repayment.
