Balloon payment
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 Origination, 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.
The Balloon Payment and the Balloon Payment Type fields on the application.
While creating an application, in Pricing > Payment Schedule, the balloon amount can be specified in the Balloon Payment field and the type of the balloon payment can be selected in the Balloon Payment Type field as highlighted in the following image:
You can select one of the Balloon Payment Types while creating an application. If you do not select anything, then the default value is considered, which is Balloon Amount Including Principal and Interest.
If the Setup Flexible Repayment Schedule flag is set to true, then these two fields, Balloon Payment and Balloon Payment Type, are unavailable on the Pricing > Payment Schedule page.
These two fields are disabled on the Pricing > Payment Schedule page if the Amortization Term has a value greater than 0.
The balloon payment works for both the Repayment Procedures: Equated Principal and Equal Monthly Installments.
If both the Amortization Term and the Balloon Payment are defined, the value in the Amortization Term takes precedence over the value in the Balloon Payment.
Balloon payment type
The Balloon Payment 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.
The Balloon Payment Type field provides the following two options to select from:
Balloon Amount Including Principal and Interest
When this Balloon Payment 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 $10,083.33.
Thus, the interest calculated between the second last schedule Due Date and the last schedule Due Date is reduced from the last Total Due Amount, and the remaining is the Due Principal amount.
Thus,
Due Principal
= Total Due Amount - Due Interest
= 10,083.33 - (interest calculated between the Due Dates May 1, 2021, and June 1, 2021.)
= $10,083.33 - $83.33
= $10,000.
Balloon amount including only principal
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 Total Due Amount of this preceding schedule is the sum of the due principal of the EMI and the Balloon Payment.
Thus, Total Due Amount = (The due principal portion of the EMI + Balloon Payment) + Due Interest of the EMI = (1,250 + 10,000) + 93.75 = 11,343.75.
Thus, when you specify a balloon payment and select the Balloon Payment Type as Balloon Amount Including Only Principal, 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.
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 repayment procedure offers you multiple options for generating the repayment schedule for the loan. These include:
Equal Monthly Installments- The installment amount remains constant each month. This is the default value.
Flexible- The installment amount changes each month.
Equated Principal - The principal amount remains constant each month. The interest is calculated based on the principal outstanding, and over the life cycle of the loan, both the installment amount and the interest amount decrease.
Interest Only- During this period, the borrower is charged only for the interest accrued.
The two types of repayment procedures that the Balloon Payment supports are:
Equal Monthly Installments
Equated Principal
Equal monthly installments
When this Repayment Procedure is selected, the balloon amount depends on the Balloon Payment Type.
When Balloon Payment Type = Balloon Amount Including Principal and Interest
When this Balloon Payment Type is selected, the formula for calculating the balloon payment for an Equal Monthly Installments repayment procedure is:
Total Due Amount = Balloon Payment = Due Principal + Due Interest.
When Balloon Payment Type = Balloon Amount Including Principal
When this Balloon Payment 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:
Total Due Amount = Balloon Payment + EMI = Due Principal (Balloon Payment + due principal portion of the EMI) + Due Interest portion of the EMI
Equated principal
When this Repayment Procedure is selected, the balloon amount depends on the Balloon Payment Type.
Balloon Type = Balloon Amount Including Principal and Interest
When this Balloon Payment Type is selected, the formula for calculating the balloon payment for an Equated Principal repayment procedure is:
Total Due Amount = Balloon Payment + Due Interest = Due Principal (Balloon Amount) + Due Interest
Balloon Type = Balloon Amount Including Principal
When this Balloon Payment Type is selected, the formula for calculating the balloon payment for an Equated Principal repayment procedure is:
Total 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, when the Balloon Payment amount is more than the Loan Amount. | Balloon Amount should be less than or equal to loan amount. |
On rescheduling
On selecting the Reschedule button, the Q2 Loan Servicing API gets called to reschedule a loan, and when a loan is rescheduled, the Balloon Payment and the Balloon Payment Type are affected in the following way:
Balloon Payment
While rescheduling a loan, if the API finds that the Balloon Payment amount is less than the Loan Amount, then the entire Loan Amount is considered as the Balloon Payment amount.
Balloon Payment Type
While rescheduling, you can also change the Balloon Payment Type. If the Balloon Payment is already defined, then the Balloon Payment Type field appears on the Pricing page where you can change its value to either of the two options. However, if none of the options of the Balloon Payment Type are selected, then the default value is considered, which is Balloon Amount Including Principal and Interest.