Which statement describes balloon payments in leases?

Which statement describes balloon payments in leases?

• A. Balloon payments increase monthly payments.
• B. Balloon payments have no effect on pricing.
• C. They are large end-of-term payments used to lower monthly payments.
• D. They eliminate the need for residual values.

Answer: (C)

Balloon payments are large lump-sum amounts due at the end of a lease, set up so the monthly payments during the term are kept lower. By deferring part of the asset’s cost to the end of the term, the lease price can be lower each month, which is why this structure is used. This option describes the practice accurately: a substantial end-of-term payment that lowers monthly cash flow. In contrast, balloon payments do affect pricing (they’re part of the total cost), they don’t eliminate residual values (the balloon effectively acts as the residual), and they don’t increase monthly payments—their purpose is to reduce them.

Balloon payments are large lump-sum amounts due at the end of a lease, set up so the monthly payments during the term are kept lower. By deferring part of the asset’s cost to the end of the term, the lease price can be lower each month, which is why this structure is used. This option describes the practice accurately: a substantial end-of-term payment that lowers monthly cash flow. In contrast, balloon payments do affect pricing (they’re part of the total cost), they don’t eliminate residual values (the balloon effectively acts as the residual), and they don’t increase monthly payments—their purpose is to reduce them.