How Balloon Loans Work: 3 Ways to Make the Payment

How Balloon Loans Work: 3 Ways to Make the Payment

Whether you’re trying to buy a new car or your dream home, loans can be a necessary burden. It’s not a good feeling when your most valuable assets are still technically owned by someone else. As a borrower, you only have so much power.

To pay off a loan the magnitude of a home or car loan takes consistency and patience. If you have a balloon mortgage, then you have to be more strategic in how you structure your loan payments. Whether it’s a mortgage or auto loan, if you don’t keep up with your payments, then you’ll lose your asset. You’ll also do extensive damage to your credit score.

Figuring out the best way to make balloon repayments is tricky, so continue reading to learn more.

What Is A Balloon Loan?

If you’re not a finance professional or aficionado, then you’re probably thinking “What are balloon repayments?” In reality, it’s a loan structured to allow the borrower to make lower loan payments early on in the term of the loan. In return for the lower loan payments early on, the borrower makes a larger lump sum payment at the end.

Balloon loans sound like a sweet idea, but you need to be careful before you agree to one. The last payment you make will be substantially larger than all of your previous monthly payments. If for whatever reason you’re unable to make your balloon payment, then your house or car could be seized as payment.

Not only that, but it will bring your credit score. Even if you make all of your monthly payments but miss your balloon payment, you could lose your home or car. Read on to get some tips on how to pay off your balloon loan and save your investment.

1. Make Larger Payments

One of the things that many people love about balloon payments is that they allow you to make lower payments on your loan. These loans are convenient, but they’re more suited to your situation if you need those monthly savings short term. Once your financial situation improves, you should make larger payments on your loan.

The main benefit of making larger payments on your loan is that you’ll knock a chunk off what you’ll owe for your last payment. If your payments are large enough, then you’ll eliminate that large balloon payment at the end.

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2. Get Another Loan

In most cases, getting a loan to pay off another loan is a bad idea. There’s no reason to even expound upon why that’s a bad idea. It’s what many people refer to as “robbing Peter to pay Paul.” However, there are rare cases where it makes sense to get a loan to pay off another one.

One way to look at balloon payments is as a large down payment on the back end of a loan. The advantage is that there are no more payments on that loan after your balloon payment. Because of that, it’s worth it to get a loan to make your balloon payment.

If you make all of your car payments for seven years, then it doesn’t make sense to lose your car because you can’t make the last payment. If you get a loan to make your balloon payment, then you’ll essentially be extending your loan for a few more years instead of making a balloon payment.

3. Sell Your Asset

Another way to pay off your balloon loan is to sell the asset the loan is attached to. If it’s a home, then its value may have appreciated since you purchased it. Selling it gives you the opportunity to make a profit after making your balloon payment.

People are always looking for houses, condos, and even log homes for sale. If you’re able to find a buyer for your property, then that’s a lot better than losing it to foreclosure.

Before signing any loan agreement, you need to make sure that it’s a loan you can manage. Be smart about making your payments—it’s crucial to your financial health.

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