There is a type of financing that is known as loan ball whose characteristic is that it is not fully amortized over time, payment fees are rather low and requires a final payment known as “balloon payment” at the end of period debt, and thus the balance or total balance is canceled.
It is very attractive for borrowers short term because they are usually low interest if compared with other conventional long-term loans. However, the borrower must be aware of the risks if you do not have the funds to cover the final payment and are associated with refinancing or an adjustment in the interest rate.
These loans are generally used for the purchase of cars and real estate, especially commercial.
They are beneficial for people who plan to sell the collateral before the final payment is due, but can be a problem when you are not able to cover the balloon payment, or can not refinance.
At maturity, the balloon loan requires that the balance is paid in full. If you do not have the funds, you have the option to sell the collateral or refinance the balance. The latter will be very easy if the collateral has gained value.
If you can not pay or refinance the final sum, collateral may be lost through a foreclosure process.
This type of loan reduces monthly car payments, but eventually you have to pay the principal amount.
This is a good option if you need to save keeping fees low pay, but as long as you are sure you have enough to meet the final payment as mentioned funds is considerably higher.
If you decide to refinance, this can add more years to the debt, ie, a loan that was originally acquired by 3 or 5 years, ends extending to 8 or 10 years.
It may be convenient for those who need car temporarily and then expect to sell. In this case we must take into account that cars depreciate rapidly and it is very certain that the market value is less than the final payment.
• The payments are less allowing you to save to meet the final payment, or earmark more funds for other activities.
• The loan generally given the option, that is, you can sell the collateral and use the proceeds from the sale to cover the final payment. It may be that the lender has a right to hold against good, so it is important to coordinate the transaction to avoid delays.
• It is very advantage when good gains value over time and the selling price exceeds the value of balloon payment, as in the case of real estate.
• If the collateral is likely to lose value over time as in the case of cars, it is likely that the amount of the balloon payment is greater than the value of the collateral, which would complicate its sale in the amount of outstanding debt.
That is why in many cases, the balloon loan is not the best financing option.
These loans can be very beneficial in certain cases, especially when the collateral tends to gain value but also has its disadvantages. These loans are not for everyone, so you should analyze well the advantages and disadvantages without getting caught by the attractiveness of the monthly payments.