A balloon payment is a large, lump-sum payment due at the end of a loan term after a series of smaller, regular payments. During the life of the loan, the borrower typically pays interest and sometimes a portion of the principal. However, those payments are not enough to fully repay the loan balance, which is why a sizable amount remains due at maturity.

Balloon payments are commonly used in balloon loans, commercial real estate financing, auto loans, and some business loans. The main attraction is lower monthly payments, which can improve short-term cash flow. This structure is often chosen when the borrower expects higher future income, plans to sell the asset, or intends to refinance before the final payment is due.

Despite the initial affordability, balloon payments carry significant risk. If market conditions change, refinancing may become expensive or unavailable. If the asset value falls or income expectations are not met, the borrower may struggle to make the final payment, potentially leading to default.

Because of this risk, a clear exit strategy is essential. Borrowers should understand the exact size and timing of the balloon payment and realistically assess their ability to repay or refinance. When used carefully, balloon payments can be useful financial tools, but without proper planning, they can create serious financial strain at the end of the loan term.