balloon payment
A large lump-sum payment due at the end of a loan term after a period of smaller regular payments, common in commercial real estate loans.
Example
“The commercial mortgage had a 7-year balloon payment — 30-year amortization but the full balance due in year 7.”
Memory Tip
BALLOON payment — it balloons up at the end. Small payments, then one massive final one.
Why It Matters
Balloon payments matter because they significantly affect your total borrowing costs and cash flow planning. Understanding this payment structure helps you determine whether you can afford the large final payment and whether the loan truly fits your financial situation over its full term.
Common Misconception
Many people assume that because their monthly payments are low, the loan is cheaper or easier to manage overall. In reality, the balloon payment can be larger than the original loan amount, making the true cost of borrowing much higher and potentially creating a financial crisis if you cannot pay the lump sum.
In Practice
A commercial real estate investor borrows $500,000 over 10 years with monthly payments of $2,500. After 120 months of paying $300,000 total, they owe a balloon payment of $350,000 due immediately. If property values decline and they cannot refinance or sell, they may struggle to come up with this large final payment despite years of steady monthly payments.
Etymology
From French 'ballon' (balloon) — the final payment 'balloons' large at the end.
Common Misspellings
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Related Terms
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See Also
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