What is the meaning of Balloon Payment?
A Balloon Payment is a huge sum which is to be paid at the end of the balloon loan like a mortgage, commercial loan and even an amortized loan. It can be a part of both a fixed and flexible interest rate regime. In a balloon loan, only a small part of the principal balance of the loan is paid over the term of the loan and the rest is due to final payment. The latter is a huge sum as compared to the other payments and is thus referred to as the balloon payment. They are at least double the number of previous payments of the loan. Such loans and payments are more common in commercial segments than in consumer loans.
They are highly useful for borrowers as the initial payment is lower and thus helps the ones who are facing a shortage of funds but are hopeful for a more bright position in future. Moreover, the borrower is able to save the interest cost of the outflow of interest every month.