A balloon loan keeps the monthly payment low by leaving part of the balance unpaid when the term ends. The payment is not lower because the loan is cheaper — it is lower because you are paying less of it each month and a large sum is waiting at the end. This calculator shows all three numbers: the payment, the balloon, and the extra interest the arrangement costs.
Someone has been offered a loan with a lower monthly payment and a large sum due at the end — a balloon mortgage, a car loan with a final payment, or a business loan — and wants to know what the payment is, what the balloon is, and what the arrangement costs overall.
An ordinary loan amortises to zero: the payment is set so that the final one clears the balance exactly. A balloon loan amortises to a target instead. The payment is calculated as if the loan were being repaid over a much longer period, and at the end of the agreed term whatever is left becomes payable in one sum.
That is why the payment looks attractive. On a $300,000 loan at 6.5% over ten years, full amortisation costs $3,406.44 a month. The same loan with a 50% balloon costs $2,515.72 — $890.72 less every month. The loan has not become cheaper; half of it has simply been deferred.
The balloon is not a penalty and it is not a surprise if the paperwork is read. It is the defining feature of the product: a lower payment in exchange for a lump sum, and usually a higher total interest cost.
Because the balance falls more slowly, interest is charged on a larger amount for longer. On that $300,000 loan, full amortisation over ten years costs $108,772.72 in interest. The same loan with a 50% balloon costs $151,886.36 — $43,113.64 more, in exchange for a payment that is $890.72 lower each month.
Whether that is a good trade depends entirely on what happens at the end of the term. If the balloon can be paid from savings, or refinanced at a similar rate, the arrangement may have been worth it. If it cannot, the borrower is negotiating from a position with no alternatives, and the refinance terms will reflect that.
The arithmetic is worth running in both directions before signing: what the payment saves over the term, against what the balloon costs in total interest. On this loan the saving is about $107,000 over ten years and the extra interest is about $43,000 — which looks favourable, and is, provided the balloon is genuinely manageable.
Balloon structures appear in three common places. Commercial mortgages often use a ten-year term on a twenty-five-year amortisation, leaving a large balance due at year ten. Some car finance uses a final "balloon" or "guaranteed future value" payment. And some business loans are structured this way to keep early cash flow free.
There are three ways it ends, and only the first is comfortable. Pay it from savings. Refinance it into a new loan — which resets the clock and usually costs fees. Or sell the asset, which works if the asset is worth more than the balloon and fails if it is not.
The risk to understand is the third one. In 2008 a great many balloon mortgages ended with the property worth less than the balloon, which left borrowers unable to sell, unable to refinance and unable to pay. The payment had been affordable for ten years; the product was still ruinous. A balloon is a bet that the end will be manageable, and the calculator can show the size of the bet but not whether it will be won.
M = (P − B ÷ (1 + i)^N) × i ÷ (1 − (1 + i)^−N) where B = P × balloonPct, i = APR ÷ 12
The term B ÷ (1 + i)^N is the balloon discounted back to today. Subtracting it from the loan turns "amortise P down to B" into "amortise a smaller amount down to zero" — the same arithmetic as an ordinary loan. Without that step the payment comes out too high, because it would repay the balloon as well as the loan.
A $300,000 loan at 6.5% over ten years with a 50% balloon. The monthly payment is $2,515.72 and the balloon is $150,000. Total payments come to $451,886.36, of which $151,886.36 is interest. For comparison, the same loan repaid in full over ten years costs $3,406.44 a month and $108,772.72 of interest — so the balloon lowers the payment by $890.72 and adds $43,113.64 to the cost.
Setting the balloon to 0% turns the loan back into an ordinary one. The payment rises to $3,406.44 and the interest falls to $108,772.72, with nothing due at the end. This is the baseline the balloon is measured against, and it is the number to compare any offer to: the difference in payment is what the balloon buys, and the difference in interest is what it costs.
A $400,000 loan at 7% over seven years with a 40% balloon. The payment is $4,555.58 and $160,000 falls due at the end. Total interest is $142,668.43. A shorter term and a smaller balloon both push the payment up, which is the general rule: the more of the loan you repay during the term, the less there is at the end and the more each month costs.
A single large sum due at the end of a loan whose monthly payments were set below the level needed to repay it. The payment is calculated as if the loan ran much longer, and the unpaid balance becomes payable when the agreed term ends — typically half the loan or more.
The monthly payment is lower and the total cost is higher. On a $300,000 loan at 6.5% over ten years, a 50% balloon reduces the payment by $890.72 a month and adds $43,113.64 to the interest. The lower payment is bought, not saved.
There are three routes: pay it from savings, refinance it into a new loan, or sell the asset. Refinancing resets the term and usually costs fees, and selling only works if the asset is worth more than the balloon. If none of the three is available, the position is difficult — which is why the balloon should be planned for from the start rather than at the end.
Discount the balloon back to today at the loan rate, subtract that from the amount borrowed, and calculate the payment that amortises the remainder to zero over the term. The result is a payment that services the interest and repays part of the principal, leaving the balloon outstanding at the end.