What is a loan that has a balloon payment due at the end of a specific period?

A balloon loan is characterized by having a large final payment due at the end of its term, known as the balloon payment. Unlike fully amortized loans, where payments are structured to pay off the entire principal plus interest by the end of the term, or partially amortized loans, which require periodic payments that do not fully pay off the loan, balloon loans typically have smaller periodic payments that do not equal the total amount borrowed. This creates a remaining balance that is due as a lump sum when the loan matures.

Balloon loans can be appealing for short-term financing needs, such as bridge financing, where the borrower plans to refinance or sell the property before the balloon payment is due. It’s important for borrowers to understand the implications of a balloon payment, as it can create financial stress if they are not prepared to handle the larger payment at the end of the loan term.