Balloon payment
National Real Estate Exam glossary · National Real Estate Exam
Definition
A final loan payment substantially larger than the preceding periodic payments, owed at the end of a partially amortized loan because the scheduled payments did not fully retire the principal.
Balloon payment in plain English
A balloon payment is one giant final payment on a loan, much bigger than all the small monthly payments that came before it. It happens because the regular payments were set too low to fully pay off the loan (the loan was only 'partially amortized'), so a big lump of the original borrowed amount — the principal — is still owed at the very end. Imagine paying $200 a month on a car for a few years, then getting hit with a surprise final bill of $8,000 to actually own it. Borrowers like the low monthly payments, but they have to plan for that big final hit — usually by refinancing or selling.
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