Financial Terms Glossary

Balloon Payment

Formal

For a rental/lease contract, a significant 'final' payment, much bigger in size than regular payments, that matches the end of life value of the asset being rented / leased. Its purpose is to reduce the monthly payment being made through the life of the contract, and offset the impact of the large final payment by re-sale of the asset itself.

Informal

You want to have a car, but need to keep the monthly payments down. The car costs $20,000. The instalments to pay fully for this over 36 months are about $450, but the car is worth money after 3 years. You want payments that don't fully pay for the car over 3 years, because you will be selling this at the end of the 3 year period for $10,000. So, change the payment profile to 35 @ $225 and a final 'balloon' payment of $10,000 which you should be able to settle from the car sale proceeds.

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