← Back to Glossary
Balloon Payment
Definition
A balloon payment is a large, lump-sum payment due at the end of a loan term after a series of smaller regular payments.
Explanation
Balloon loans structure payments so that monthly payments are lower (often interest-only or partially amortized), with the remaining principal balance due as a balloon payment at maturity. These loans are riskier because the borrower must have funds available for the large final payment.
Balloon mortgages were common before the 2008 financial crisis and are now less common. They can make sense for borrowers who expect a large inflow of cash before the balloon payment is due.
Example
A $200,000 balloon loan at 5% with interest-only payments for 5 years requires $833/month, then the full $200,000 is due as a balloon payment.