balloon payment
A balloon payment is one large sum due at the end of a loan, which keeps the monthly payments low and the ending expensive.
In plain English
The monthly payment looked extraordinarily manageable, and that should have been the question rather than the reassurance.
A balloon loan has small regular payments and then one very large sum due at the end. The monthly instalments cover mostly interest and very little principal, so at the end most of what you borrowed is still owed, and it is owed all at once.
Lenders like this structure because it makes an unaffordable loan feel affordable. Borrowers like it because the monthly figure fits the budget. And a great many people sign one without ever asking themselves the only question that matters, which is where the final payment will come from.
The usual answer, unspoken, is that they will refinance. Take a new loan to pay the old one. Which works, provided that rates are favourable, that your income is intact, and that a lender is willing. Three things you are betting on, years in advance, with no control over any of them.
If the refinance is not available when the balloon lands, you sell the asset in a hurry or you default.
Never take a balloon payment you have no concrete plan to pay.
You borrow ₦20 million with low monthly payments and a ₦15 million balloon due in year five. Year five arrives, rates have risen, your lender declines to refinance, and ₦15 million is due in one month.
Questions people ask
Why do lenders offer balloon loans?
Because a low monthly payment makes a large loan feel affordable. The structure moves the difficulty to the end, where it is somebody else's problem until it is yours.
What if I cannot pay the balloon?
You refinance, sell the asset, or default. All three depend on conditions years away that you cannot control today.
Are they ever sensible?
Where you have a genuine, concrete source for the final payment, such as a known maturity or sale. Hope is not a source.
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