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Balloon Loan

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A balloon loan is any loan that has one final large payment called the balloon payment due at the end of the loan period. Bullet loan and balloon note are also common terms for the balloon loan. A balloon loan may be short-term or long-term. Before the balloon payment, a balloon loan may have partially amortizing or interest only payments. The balloon loan is most common in real estate, in which case it is often called a balloon mortgage. (For the lender, balloon loan default is a serious risk, but as excellent collateral, interest in the title to real property mitigates this risk.) The advantage of a balloon loan is that payments are very low relative to the principal borrowed. The usual assumption is that the final payment of the balloon loan will be met through either refinancing, sale of the collateral, or another anticipated cash flow event.

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