Balloon Payment
A large lump-sum payment due at the end of a loan term after a series of smaller regular payments.
What is Balloon Payment?
A balloon payment is an oversized final payment required at the end of a loan term that has featured smaller, often interest-only or partially amortizing, periodic payments. Balloon loans are common in commercial real estate mortgages, some auto loans, and business lending. The appeal is lower initial monthly payments — borrowers pay less during the loan term but face a large principal repayment at maturity. Borrowers typically plan to sell the asset, refinance, or make a large cash payment at maturity. The risk is that refinancing may not be available when the balloon comes due, particularly if interest rates have risen or the borrower's financial situation has deteriorated.
Example
A commercial real estate investor takes a $2 million, 7-year balloon mortgage. For 7 years, monthly payments cover interest plus minimal principal (as if amortizing over 30 years). At year 7, the remaining $1.85 million balance is due as a balloon payment. The investor plans to either sell the property or refinance into a new long-term loan. If the commercial real estate market tightens and lenders won't refinance, the investor faces foreclosure or a forced sale.
Source: Investopedia — Balloon Payment