Balloon Payment
Overview
A balloon payment, generally, is a larger-than-usual one-time payment at the end of the loan term. If you have a loan with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan.
In Q2 Loan Servicing, a balloon payment can be of any one of the following types:
- Balloon amount that includes both the principal and interest amounts.
- Balloon amount that includes only the principal amount.
The repayment amount of the last schedule is then decided based on the Balloon Type and the Repayment Procedure selected.
UI enhancement
| Release | UI enhancement |
|---|---|
| Spring'22 | A new field, named Balloon Type, is added to the contract. |
A new field named Balloon Type is added to the contract as highlighted in the following image:
You can select one of the Balloon Types while creating a contract. If you do not select anything, then the default value is considered, which is Balloon Amount Including Principal and Interest.
The Balloon Payment field in the loan contract
While creating a loan, the balloon amount can be specified in the existing Balloon Payment field as depicted in the following image:
Balloon Type
The Balloon Type field helps you decide if the balloon amount is only the outstanding principal to be paid in the end, or is the last payment amount including interest (like it did in the system earlier.)
The Balloon Type field provides the following two options to select from:
- Balloon amount that includes both the principal and interest amounts.
- Balloon amount that includes only the principal amount.
Balloon amount that includes both the principal and interest amounts
When this Balloon Type is selected, the last schedule is considered a balloon payment, and the amount is divided into Principal and Interest (for that period).
Example
To understand this, let us look at the following example.
Let us say a contract has the following values:
| Balloon Payment | $10,000 |
| Term | 12 |
The Repayment Schedule gets generated as follows:
We observe that the balloon payment is in the last schedule and it is in the amount of $9,999.96, which is ($10,000 - some rounding calculations).
Thus, the interest calculated between the second last schedule Due Date and the last schedule Due Date is reduced from the last Due Amount, and the remaining is the Due Principal amount.
Thus,
Due Principal
= Balloon Payment - Due Interest
= 10,000 - (interest calculated between the Due Dates 1/2/2017 and 2/2/2017)
= ($10,000 - some rounding calculation amount) - $41.49
= $9,999.96 - $41.49
= $9,958.47.
Balloon amount that includes only the principal amount
With the Spring'22 release, this is a new way of calculating the balloon payment. Here, the EMI amount is added along with the balloon amount to the last schedule where the balloon amount is solely accounted for the principal, and the EMI is accounted for principal and interest.
This means that the last payment in the Repayment Schedule will be a sum of the EMI and the balloon amount.
Example
To understand this, let us look at the following example.
The last Due Amount of this preceding schedule is the sum of the due principal of the EMI and the Balloon Payment.
Thus, Due Amount = (The due principal portion of the EMI + Balloon Payment) + Due Interest of the EMI.
Thus, earlier, the balloon payment calculation in the calculator assumed that the final payment on the loan is equal to the balloon payment. With the Spring'22 release, when you specify a balloon payment and select the Balloon Type as Balloon amount that includes only the principal amount, it corresponds to the extra principal that you have to pay as part of the final payment over and above the EMI that is calculated. The system considers the balloon amount to be the principal amount outstanding which would be paid at the end of the loan tenor. In this case, the balloon amount does not include any interest component. It is just principal. You can decide if the balloon amount is only the outstanding principal to be paid in the end or is the last payment amount including interest (like it did in the system earlier). You can do this selection with the help of the Balloon Type field.
Repayment Procedure
The formula for calculating the balloon payment also depends on the repayment procedure selected. A Repayment Procedure is a procedure that will be followed to create the installment schedule or the repayment schedule. The two types of procedures are:
Repayment Procedure is a field in the Schedule Parameters section of the Lending Product as highlighted in the following image:
Equal Monthly Installments
When this Repayment Procedure is selected, the balloon amount depends on the Balloon Type.
When Balloon Type = Balloon amount that includes both the principal and interest amounts
When this Balloon Type is selected, the formula for calculating the balloon payment for an Equated Monthly Installments repayment procedure is as it was earlier before the Spring'22 release:
Due Amount = Balloon Payment = Due Principal + Due Interest.
When Balloon Type = Balloon amount that includes only the principal amount
When this Balloon Type is selected, the EMI amount is added along with the balloon amount to the last schedule where the balloon amount is solely accounted for principal and EMI is accounted for principal and interest. Thus, the formula is:
Due Amount = Balloon Payment + EMI = Due Principal (Balloon Payment + due principal portion of the EMI) + Due Interest portion of the EMI
Along with Due Principal and Due Interest, Due Fee and Due AIC will also be considered in schedules when Include In schedules flag is true for both of them.
Equated Principal
When this Repayment Procedure is selected, the balloon amount depends on the Balloon Type.
Balloon Type = Balloon amount that includes both the principal and interest amounts
When this Balloon Type is selected, the formula for calculating the balloon payment for an Equated Principal repayment procedure is as it was earlier before the Spring'22 release:
Due Amount = Balloon Payment + Due Interest = Due Principal (Balloon Amount) + Due Interest
Balloon Type = Balloon amount that includes only the principal amount
When this Balloon Type is selected, the formula for calculating the balloon payment for an Equated Principal repayment procedure is:
Due Amount = Balloon Payment + EPI = Due Principal (Balloon Amount + Equated Principal) + Due Interest
Error messages
The following table lists the error messages that you may encounter:
| Scenario | Error message |
|---|---|
| While generating the amortization schedule or while creating a contract, when the Balloon Payment amount is more than the Loan Amount. | Balloon Amount should be less than or equal to loan amount. |
Objects modified
The following objects have been modified to add new fields:
| Object | Added Fields | ||
|---|---|---|---|
| Field Label | Field Type | Field Description | |
| Loan Parameters | Balloon Type | Picklist | This field defines whether the balloon amount is to be considered for both principal and interest or only principal. |
| Other Loan Transaction | Balloon Payment | Decimal | This field indicates the balloon payment amount of the contract. |
| Balloon Type | Picklist | This field indicates the balloon type of the contract. | |
For more information, see the Q2 Loan Servicing Data Dictionary guide.
Global Class modified
The following global class is modified:
- LoanRescheduleParameters: A new parameter, named balloonType, is added. This parameter will define the Balloon Type to be followed while rescheduling or creating a loan contract.
For more information, see the details of the LoanRescheduleParameters global class in the Q2 Loan Servicing Global Methods guide.
On rescheduling
When a loan is rescheduled, the Balloon Payment and the Balloon Type are affected in the following way:
Balloon Payment
While rescheduling a loan, if the system finds that the Balloon Payment (defined while creation of contract) amount is less than the Loan Amount, then the entire Loan Amount is considered as the Balloon Payment amount.
Balloon Type
While rescheduling, you can change the Balloon Type. If the Balloon Payment is already defined in the contract, then the Balloon Type field appears on the Reschedule page where you can change its value to either of the two options. However, if none of the options of the Balloon Type are selected, then the default value is considered, which is Balloon Amount Including Principal and Interest.