Balloon Loan Lending Practice

A balloon loan is any loan which has a final payment that is larger than any of the previous payments on the loan. The final payment is called a balloon payment. The term loan described earlier is a type of balloon loan. Partially amortized loans, discussed next, are also a type of balloon loan. In the tight money markets of recent years, the use of balloon loans has increased considerably. Balloon loans with maturities as short as 3 to 5 years have been commonplace. This, in effect, gives the buyer (borrower) 3 to 5 years to find cheaper and longer-term financing elsewhere. If such financing does not materialize and the mortgage loan is not repaid on time, the lender, usually the seller, has the right to foreclose. The alternative is for the lender and borrower to agree to an extension of the loan, usually prevailing interest rates. 

What’s next? Go To Partially Amortized Loans