Balloon Loan

Repayment type: annuity with the plan Fixed installment

Also known as: Ballondarlehen, Darlehen mit Restschuld, partially amortizing loan

The loan amortizes only partly during the term; a large final payment, the balloon, settles the rest. Typical for vehicle and equipment finance, and the natural result of any annuity whose installment was set by an initial repayment rate rather than by the term.

How it works

The installment is agreed in the contract and does not clear the balance by maturity.

1. Formula

$$I_t = B_{t-1} \cdot r$$ $$P_t = A - I_t$$ $$\text{Balloon} = B_n$$

where $A$ is the agreed installment, $r$ the interest rate per period, $B_{t-1}$ the balance before period $t$, $I_t$ the interest, $P_t$ the principal share and $B_n$ the balance left after the last regular installment.

2. With the terms

$$\text{Interest} = \text{Previous balance} \cdot \text{Rate per period}$$ $$\text{Principal} = \text{Agreed installment} - \text{Interest}$$ $$\text{Balloon} = \text{Balance after the last installment}$$

3. With the example numbers: 100,000 EUR, 4.00 % p.a. with one installment per year, agreed installment 15,000, 5 years.

$$I_1 = 100{,}000 \cdot 0.04 = 4{,}000.00$$ $$P_1 = 15{,}000.00 - 4{,}000.00 = 11{,}000.00$$ $$B_1 = 100{,}000 - 11{,}000.00 = 89{,}000.00$$

Repeating this for five years leaves $B_5 = 40{,}420.46$, the balloon.

Example

100,000 EUR at 4.00 % p.a., 5 years, fixed installment 15,000 per year.

Against the annuity to maturity on the same terms, the installment is 7,462.71 lower each year, but 40,420.46 is still owed at the end and 3,106.91 more interest has been paid.

In LoanMonitor

• Wizard, Terms: repayment type Annuity, plan Fixed installment, enter the installment as amount. The wizard previews the remaining balance at maturity, which is the balloon.
• A balloon that is refinanced is recorded under Adjustments → Renewals with the new maturity and rate.
• A balloon that is paid from own funds simply appears as the final row of the schedule.

Related

• Loan Types overview
• Annuity Loan
• Rate Lock and Prolongation