Benefits of balloon payments for all consumers

22nd June 2015

 
 

While availing a lending product from a bank, you always ensure thorough understanding of its terms and conditions. One of the attractive features, though offered by only a few banks, is the option of a balloon payment. Simply put, a balloon payment allows you to repay a certain amount of your principle to reduce markup charges before completion of the loan tenure. Why is this important and how does it economize your loan repayment budget?

 


1.    Where an installment amount comprises of principle repayment and markup cost, a balloon payment is a direct payment to reduce the outstanding principle amount. After a balloon payment, the reduced outstanding principle translates into lower markup costs for the remaining tenure and a reduction in monthly installment amounts.


2.    Though every balloon payment carries a 5-10% penalty charge against outstanding principle, the present markup rates on secured (car and home loans) and unsecured (personal loans) financing are considerably higher. Therefore a one-time penalty charge of 10% is still more economical than continuation of markup costs for the future.


3.    Balloon payments are especially useful to you if you receive annual bonuses and are looking to reduce your car loan or mortgage’ monthly installment amounts. The bonus amounts can be used as balloon payments; this would create greater disposable income for you in the future as it your debt servicing costs would be reduced.


Given the benefits of balloon payments, banks often place restrictions on the number of balloon payments against a financing facility. Some banks even refuse to allow consumers to make such interim repayments. However, we, at MyBankersOnline, strongly recommend the option of balloon payments against any loan or financing you choose to avail from the Pakistani banking sector.

 

 

 
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