Balloon Payment Clause

Balloon Payment Clause

A Balloon Payment Clause is a provision in a loan agreement that stipulates a large final payment due at the end of the loan term. This type of clause is commonly found in certain types of loans, such as mortgages or business loans, where the periodic payments made throughout the duration of the loan are significantly lower than the final payment.

In a typical loan structure with a Balloon Payment Clause, the borrower makes regular monthly payments that cover only interest and a portion of the principal, resulting in a balance that remains substantially higher than the initial amount borrowed. When the loan term ends, the borrower is required to make a lump-sum payment of the remaining principal, known as the "balloon payment."

For example, consider a five-year loan for $100,000 with a Balloon Payment Clause. The borrower may pay $1,000 monthly for five years, which primarily covers interest, but at the end of the term, they would owe the remaining principal, which could be $80,000. This structure allows borrowers to maintain lower payments during the loan term but requires planning for the significant final payment, which can pose a financial challenge if not anticipated.

Balloon Payment Clauses are often used in real estate financing, where borrowers expect to refinance or sell the property before the balloon payment comes due. It is essential for borrowers to understand the implications of such clauses and plan accordingly to avoid defaulting on the loan.