A balloon payment is a large, one-time payment due at the end of a loan’s term. This type of payment is significantly larger than the regular periodic payments made over the life of the loan. Balloon payments are common in certain types of loans, such as business loans and balloon mortgages. Unlike fully amortizing loans (where the entire loan is paid off with regular payments over time), a balloon loan defers much of the principal payment to the end.

Business loans with balloon payments are sometimes used by businesses that expect to have higher revenues or liquidity in the future. They make smaller payments initially and then pay off the bulk of the loan when they have more financial flexibility.

Pros

• Lower initial payments, which can be beneficial for borrowers with short-term cash flow constraints.

• Flexibility if the borrower expects to have more income or sell an asset before the balloon payment is due.

Cons

• The borrower faces a large, potentially difficult-to-manage payment at the end of the loan term.

• Risk of needing to refinance or sell the asset to make the balloon payment, which can be challenging if market conditions change or if refinancing is not available.