Which statement describes the effect of balloon payments on lease cost?

Which statement describes the effect of balloon payments on lease cost?

• A. Increase monthly payments.
• B. No effect on monthly payments.
• C. Lower monthly payments by shifting more cost to the end of the term.
• D. Require higher initial down payment.

Answer: (C)

A balloon payment changes the timing of costs, not the total amount financed. By agreeing to a large end-of-term payment, the lender can lower the regular monthly lease payments during the term. This improves cash flow month to month because a portion of the cost is deferred to the end. The trade-off is that when the term ends, you must either pay the balloon, refinance it, or return the asset, which could increase your end-of-term cash obligation or affect your decisions about ownership or renewal. So the statement describing the effect is that you get lower monthly payments by shifting more of the cost to the end of the term.

A balloon payment changes the timing of costs, not the total amount financed. By agreeing to a large end-of-term payment, the lender can lower the regular monthly lease payments during the term. This improves cash flow month to month because a portion of the cost is deferred to the end. The trade-off is that when the term ends, you must either pay the balloon, refinance it, or return the asset, which could increase your end-of-term cash obligation or affect your decisions about ownership or renewal. So the statement describing the effect is that you get lower monthly payments by shifting more of the cost to the end of the term.