Balloon payment

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A balloon payment occurs when a loan is structured to terminate before all the principal is paid back. The "balloon" is the (sometimes very large) payment made at the termination of the loan. In many cases the balloon payment is simply refinanced into a new loan.

The danger of a loan with a balloon payment is that you can pay a lot of money in interest on making very little progress on paying off the principal. It is easy to pay on a loan for 10 years only to find that the amount owed is virtually the same at the end as it was in the beginning.

Balloon payment loans can be useful for short-term financing where your goal is to have the lowest payment possible. But they can be a very dangerous option if you're in a situation where your collateral might decrease in value. It may be very difficult to refinance the balloon payment if the value of the collateral is worth less than the amount of the balloon.