Glossary
Balloon payment
A large lump sum owing at the end of a facility, because the repayments were never sized to clear the balance.
In plain English
A balloon, sometimes called a residual, is the amount still owing when the term ends. Repayments are calculated to reduce the balance to that figure rather than to zero, which makes them lower throughout.
It is standard on equipment and vehicle finance, and appears on some commercial term facilities. When the term ends the balloon must be repaid, refinanced, or the asset sold.
Why a lender cares
A balloon is borrowed money with the repayment deferred, and it has to be planned for from the start. The risk is refinance risk: the assumption is that a lender will be willing to refinance the residual in five years, on the asset's value and the business's position then, neither of which is knowable now. If the asset has depreciated faster than the balance, the gap is paid in cash.
Where this term takes you
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