Balloon Payment Calculator

What a balloon payment calculator does

A balloon loan is a loan with a twist at the end. You make comfortable monthly payments for a few years, and then, all at once, a large lump sum comes due: the balloon. It is a structure that keeps the monthly cost low, but it saves a big bill for the finish line, and that bill can catch people off guard.

This calculator shows you both halves of that deal. Give it the loan amount, the amortization period, when the balloon falls due, and the interest rate, and it tells you your fixed monthly payment during the early years and the size of the balloon waiting at the end. Seeing that final number in advance is the whole reason to run this before agreeing to one.

How a balloon loan is built

Here is the trick behind it. Your monthly payment is calculated as if the loan were being spread out over a long time, say 30 years. That long stretch is the amortization period, and it is what makes the monthly payment small. But the loan is not actually given to you for 30 years. It is due in full much sooner, after the balloon period, maybe 5 years in.

So you make five years of payments sized for a thirty year loan, and when the balloon date arrives, whatever balance is still left is due in one payment. Because you were only ever paying at the gentle thirty year pace, that leftover balance is large. The calculator works out the monthly payment on the long amortization, then figures out exactly how much balance is still standing when the balloon comes due.

A worked example: the balloon that stays big

Say you borrow 200,000, amortized over 30 years, with the balloon due after 5 years, at 6%. Your monthly payment works out to 1,199.10. Nice and manageable, because it is priced like a thirty year loan.

Now here is the part that stops people. After five years of paying that 1,199.10 every month, the balloon still due is 186,108.71. You borrowed 200,000, you paid for five years, and you still owe more than 186,000. Across the whole arrangement you pay about 258,055 in total, of which roughly 58,055 is interest.

Five years of payments barely touched the principal. That is not an error, it is the nature of the structure, and it is exactly why you want to see that 186,000 figure long before the balloon date rather than on it.

Why the balloon is so large

It comes down to how loan payments are split. Early in any amortized loan, most of each payment is interest and only a little goes to principal, because the interest is charged on a balance that is still near its full size. A balloon loan leans entirely on those early years, the ones where the principal barely moves.

So over the balloon period you are mostly paying the lender's interest, not shrinking what you owe. When the balloon date arrives, the balance has come down only slightly, and that slightly-reduced balance is what you owe in one go. The shorter the balloon period relative to the amortization, the bigger the balloon, because you have had even less time to chip away at the principal.

The part you must plan for

A balloon loan is not a trap in itself. It can be a sensible choice if you have a clear plan for the balloon, and a real problem if you do not. When the balloon comes due you generally have three options: pay it off with cash you have set aside or expect to have, refinance it into a new loan, or sell the underlying asset to cover it. Balloon structures are common in commercial real estate for exactly this reason, where the plan is often to refinance or sell once the property has grown in value.

What you do not want is to arrive at the balloon date with no plan and no way to make that final payment. Government-backed small business loans through the SBA are deliberately structured to avoid balloon payments for this reason. So before taking a balloon loan, be honest about how you will handle the lump sum, and use this calculator to know its exact size well ahead of time. To sanity-check a plain repaying loan alongside it, the loan payment calculator and monthly payment mortgage calculator help you compare.

How to use it

• Loan Amount. The amount you are borrowing.
• Amortization Period. The long timeframe your payment is priced against, entered as years and months. This is what keeps the monthly payment low.
• Balloon Payment After. How many years until the loan is due in full and the balloon lands.
• Interest Rate. The annual rate as a percentage.

For a sensible result, keep the balloon period shorter than the amortization period, since that is what a balloon loan actually is. Press Calculate for your monthly payment and balloon amount, and Reset to clear it.

Questions people ask

What is a balloon payment?

It is a large lump sum due at the end of a balloon loan. The monthly payments are kept low by pricing them against a long amortization, so they do not fully pay off the loan, and the remaining balance is due all at once on the balloon date.

Why is the balloon almost as big as the loan?

Because in the early years of a loan, payments are mostly interest and barely reduce the principal. A balloon loan only runs through those early years, so by the balloon date the balance has come down only a little, leaving a large lump sum.

What happens if I cannot pay the balloon?

You generally need a plan before it arrives: pay it with cash, refinance it into a new loan, or sell the asset behind it. Reaching the balloon date without one of those is the real risk, so decide your route early.

References

The remaining-balance maths behind the payment and balloon figures is the standard amortization mathematics in Broverman's text. The description of where balloon structures are used, and that SBA loans are built to avoid them, follows the U.S. Small Business Administration.

1. Broverman, S. A. Mathematics of Investment and Credit. ACTEX Publications.
2. U.S. Small Business Administration. Loans. sba.gov