Definition: A balloon payment occurs when a loan is not amortized. It is generally an early due date, involving the payoff of an existing loan balance. Interest-only loans, also known as straight notes, generally contain a balloon payment provision.
Also Known As: lump sum payment
Common Misspellings: baloon payment, ballon payment
Examples: A $100,000 loan may be amortized for 30 years, but due and payable in five years. This means the buyer will make amortized payments, based on a 30-year payment plan, but the loan balance will be due in five years instead of 30, resulting in a balloon payment.
Because the biggest portion of a principal and interest payment in the early years of an amortized loan is interest, a five-year balloon payment will be close to the original unpaid balance. If only interest-only payments are paid, the original unpaid balance will be the balance due at the end of the loan term.
