Balloon payments have a significant impact on the principal amount over time. During the loan term, the principal amount decreases at a slower rate because the regular payments are typically lower than a standard loan payment. This is because these payments are primarily covering the interest, not the principal. However, at the end of the loan term, a large balloon payment is due, which significantly reduces the principal amount. This balloon payment is often much larger than the regular payments, making it challenging to pay off. If not managed properly, it can lead to unmanageable debt.
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