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Balloon payment
Also called balloon, bullet payment.
A large final payment due at maturity because the scheduled payments were calculated on a longer amortization than the actual term.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Payments are set as if the loan ran for a long period, but the loan matures earlier. At maturity the unpaid principal falls due in one sum. The structure keeps the monthly payment affordable and pushes the real repayment decision into the future.
It is standard in commercial real estate, common in conventional commercial term loans, and appears in equipment finance as a residual or final purchase payment. It is also the shape of a bridge loan, where the entire principal is repaid on exit.
The balloon is only ever settled three ways: refinance, sale of the asset, or cash. Refinance is the assumption in nearly every case, and it is an assumption about conditions years away, including where rates sit, what the asset appraises at, and whether the business still qualifies.
SBA 7(a) loans are generally structured to fully amortize without a balloon, which is one of the concrete structural advantages of that program over conventional commercial paper on the same asset.
Where this one catches people
Nothing obliges the current lender to refinance the balloon, and nothing guarantees anyone else will. A business that has paid perfectly for five years can still face a maturity it cannot meet because the property appraises lower, the debt service coverage test fails at current rates, or the lender has exited the sector. Extension is a negotiation, usually with a fee, sometimes without a yes.
Worked through
500,000 at 7 percent amortized over 25 years pays about 3,534 a month, but the note matures in 5 years. After 60 payments roughly 458,000 of principal remains and is due in full. The borrower has paid about 212,000 and still owes over 90 percent of the original loan.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Balloon payment — common questions
What does balloon payment mean?
A large final payment due at maturity because the scheduled payments were calculated on a longer amortization than the actual term.
Where does balloon payment catch people out?
Nothing obliges the current lender to refinance the balloon, and nothing guarantees anyone else will. A business that has paid perfectly for five years can still face a maturity it cannot meet because the property appraises lower, the debt service coverage test fails at current rates, or the lender has exited the sector. Extension is a negotiation, usually with a fee, sometimes without a yes.
Is balloon payment the same as an interest rate?
Balloon payment is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does balloon payment apply to?
Working Capital, Term Loan, SBA Loan, Equipment Financing.
Is there a worked example of balloon payment?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside balloon payment?
Amortization, Bridge loan, Commercial bridge loan, Debt service coverage ratio, Maturity.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.