Balloon Payment Definition & Meaning

What is a balloon payment?

A balloon payment is an extra-large one-time payment due at the end of a loan, such as a mortgage or auto loan. Most consumer loans don’t have balloon payments. 

With a balloon payment loan, instead of making fixed monthly payments that are always the same size, you make smaller monthly payments upfront and then one big payment at the end. Loans with balloon payments could offer more flexibility for the borrower—and bigger risks. 

Key concept: A large, one-time payment at the end of a loan. 

More on balloon payment

Balloon payments were used in some mortgages early last century, but they’re no longer common in consumer loans. Balloon payments are mostly found on business loans these days. 

You probably won’t ever be asked to make a balloon payment for a home equity loan or home equity line of credit (HELOC). But if you're offered a balloon payment loan for an auto loan or home mortgage, this could be a sign that your lender doesn’t think you have good enough credit to qualify for a more conventional loan. Balloon payments are usually not allowed on qualified mortgages. 

Balloon payment: a comprehensive breakdown 

Loans with a balloon payment work differently from regular installment loans. With most installment loans, the amount you pay is the same each month until the loan is paid off. For example, a typical auto loan for $30,000 with 6% interest and a five-year term would have the same $580 monthly payment for the life of the loan.

A balloon payment is usually at least twice of the loan’s typical monthly payment—or it might be a sizable percentage of the loan. For example, a home mortgage balloon payment might be tens of thousands of dollars. 

If you choose a loan with a balloon payment, you could benefit from lower monthly payments early on, which could free up extra cash in your budget at first. However, you need to plan for the big balloon payment amount that's waiting at the end of the loan term or you could be in hot water. 

If you're considering a loan that requires a balloon payment, be aware of the possible risks and downsides before you sign up for the loan. Balloon payment loans might also be interest-only loans, which means you’re not building home equity or paying down the principal with every loan payment. 

Balloon payment loans could put you at risk of foreclosure or repossession if you can’t afford to make that final payment. If you have a balloon payment loan and you’re not sure if you can make the payment, you still have options like refinancing your debt or selling the home or car tied to the loan to pay it off before the balloon payment is due.

Balloon payment: key attributes

Loans with balloon payments generally have these attributes: 

• Uncommon in consumer loans

• Typically offered only for secured debts 

• Usually offered to borrowers with lower credit scores who might not qualify for other loans 

• Lower monthly payments in the short run, helping the borrower free up cash

• One big payment at the end (which could be a large percentage of the total loan amount)

• Flexible option for borrowers who want low monthly payments

• Risky for borrowers who might not be able to afford the final balloon payment

Since balloon payments have become less common in consumer lending, you might never have the option of choosing a loan with a balloon payment. But in case you’re ever offered a balloon payment loan, or if you want to choose a balloon payment to help you save money on monthly payments, make sure to protect yourself. 

Failing to make the balloon payment could cause your loan to go into default, putting you at risk of losing any assets tied to the loan. If you currently have a balloon payment loan, make sure to save up money to cover that final payment. Another possibility is refinancing the loan before the balloon payment is due.