Which of the following best describes how balloon payments are used in leases?

• A. Increase monthly payments.
• B. No effect on total cost.
• C. Balloon payments at end of term.
• D. Only affects maintenance obligations.

Answer: (C)

Balloon payments are a lump-sum due at the end of the lease term, which lets the lessee enjoy smaller monthly payments during the term by financing most of the cost upfront and deferring part of it to the end. This end-of-term payoff is the mechanism that defines balloon payments, making the description that they occur at the end of the term the best fit. The total cost is affected because the deferred amount may incur interest and must be paid or refinanced at the end. Balloon payments do not increase monthly payments and are not about maintenance obligations.