The basic parts of a loan
Every loan has a few basic parts. The Principal is the amount borrowed — say $1,000,000. The Interest Rate is the cost of borrowing, like 6% per year. The Term is how long the loan lasts — commercial loans are often 5, 7, or 10 years. The borrower pays the lender interest on the principal, plus a portion of the principal back over time.
Amortization vs. the term
Amortization is the schedule for paying back the principal. A commercial loan might have a 25-year amortization, meaning the payments are calculated as if the loan will be fully paid in 25 years. But the loan term might only be 5 years. This means at the end of 5 years, the borrower still owes most of the money. That remaining amount is called the Balloon Payment — a big final payment due at the end of the term. The borrower usually refinances (gets a new loan) to pay it.
Monthly Payment (level-pay amortization)
Payment = P × r ÷ (1 − (1 + r)^−n)
- P
- — Principal (loan amount)
- r
- — Monthly interest rate (annual rate ÷ 12)
- n
- — Number of months in the amortization period
Annual Debt Service
Annual Debt Service is the total of all loan payments in one year — principal plus interest. This is the number lenders compare against NOI (see DSCR). If a loan requires $100,000 in payments per year, the annual debt service is $100,000. The property's NOI must be comfortably higher than this, or the lender will not approve the loan.
Interest-only (IO) periods
Many commercial loans include an interest-only period at the start (common on bridge loans and sometimes on a portion of permanent loans), during which the payment covers interest only and the principal balance doesn't decline. This raises the effective balloon amount at maturity and lowers the payment (and thus improves DSCR) during the IO period.
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Term shorter than amortization — this loan has a balloon payment.
Monthly Payment
$13,504
Annual Debt Service
$162,050
Balloon Balance
$1,811,243
9.4% amortized by maturity
Total Interest Paid
$621,492
over 5 year term
View full month-by-month schedule
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $13504 | $10833 | $2671 | $1997329 |
| 2 | $13504 | $10819 | $2685 | $1994644 |
| 3 | $13504 | $10804 | $2700 | $1991944 |
| 4 | $13504 | $10790 | $2714 | $1989230 |
| 5 | $13504 | $10775 | $2729 | $1986500 |
| 6 | $13504 | $10760 | $2744 | $1983757 |
| 7 | $13504 | $10745 | $2759 | $1980998 |
| 8 | $13504 | $10730 | $2774 | $1978224 |
| 9 | $13504 | $10715 | $2789 | $1975435 |
| 10 | $13504 | $10700 | $2804 | $1972631 |
| 11 | $13504 | $10685 | $2819 | $1969812 |
| 12 | $13504 | $10670 | $2834 | $1966978 |
| 13 | $13504 | $10654 | $2850 | $1964128 |
| 14 | $13504 | $10639 | $2865 | $1961263 |
| 15 | $13504 | $10624 | $2881 | $1958383 |
| 16 | $13504 | $10608 | $2896 | $1955486 |
| 17 | $13504 | $10592 | $2912 | $1952574 |
| 18 | $13504 | $10576 | $2928 | $1949647 |
| 19 | $13504 | $10561 | $2944 | $1946703 |
| 20 | $13504 | $10545 | $2960 | $1943744 |
| 21 | $13504 | $10529 | $2976 | $1940768 |
| 22 | $13504 | $10512 | $2992 | $1937776 |
| 23 | $13504 | $10496 | $3008 | $1934769 |
| 24 | $13504 | $10480 | $3024 | $1931744 |
| 25 | $13504 | $10464 | $3041 | $1928704 |
| 26 | $13504 | $10447 | $3057 | $1925647 |
| 27 | $13504 | $10431 | $3074 | $1922573 |
| 28 | $13504 | $10414 | $3090 | $1919483 |
| 29 | $13504 | $10397 | $3107 | $1916376 |
| 30 | $13504 | $10380 | $3124 | $1913252 |
| 31 | $13504 | $10363 | $3141 | $1910112 |
| 32 | $13504 | $10346 | $3158 | $1906954 |
| 33 | $13504 | $10329 | $3175 | $1903779 |
| 34 | $13504 | $10312 | $3192 | $1900587 |
| 35 | $13504 | $10295 | $3209 | $1897378 |
| 36 | $13504 | $10277 | $3227 | $1894151 |
| 37 | $13504 | $10260 | $3244 | $1890907 |
| 38 | $13504 | $10242 | $3262 | $1887645 |
| 39 | $13504 | $10225 | $3279 | $1884366 |
| 40 | $13504 | $10207 | $3297 | $1881069 |
| 41 | $13504 | $10189 | $3315 | $1877754 |
| 42 | $13504 | $10171 | $3333 | $1874421 |
| 43 | $13504 | $10153 | $3351 | $1871070 |
| 44 | $13504 | $10135 | $3369 | $1867701 |
| 45 | $13504 | $10117 | $3387 | $1864313 |
| 46 | $13504 | $10098 | $3406 | $1860907 |
| 47 | $13504 | $10080 | $3424 | $1857483 |
| 48 | $13504 | $10061 | $3443 | $1854040 |
| 49 | $13504 | $10043 | $3461 | $1850579 |
| 50 | $13504 | $10024 | $3480 | $1847099 |
| 51 | $13504 | $10005 | $3499 | $1843600 |
| 52 | $13504 | $9986 | $3518 | $1840082 |
| 53 | $13504 | $9967 | $3537 | $1836545 |
| 54 | $13504 | $9948 | $3556 | $1832989 |
| 55 | $13504 | $9929 | $3575 | $1829413 |
| 56 | $13504 | $9909 | $3595 | $1825818 |
| 57 | $13504 | $9890 | $3614 | $1822204 |
| 58 | $13504 | $9870 | $3634 | $1818570 |
| 59 | $13504 | $9851 | $3654 | $1814917 |
| 60 | $13504 | $9831 | $3673 | $1811243 |
Module Check
What is the Balloon Payment on a commercial loan?