A balloon payment is a large final payment due at the end of a loan or financing agreement. Unlike typical installment loans, where payments are relatively equal throughout the term, a balloon payment structure requires smaller periodic payments initially, followed by a substantial payment that settles the remaining balance at the end of the loan term.
This payment structure is common in certain loans, such as real estate or auto loans, where borrowers may benefit from lower initial payments. It can also be advantageous for businesses expecting higher revenues in the future or those planning to refinance before the balloon payment comes due. However, it carries a significant risk, as borrowers must ensure they can fulfill the large final payment, which may require careful financial planning or refinancing options.
Understanding balloon payments is crucial for borrowers, as it impacts cash flow and long-term financial obligations. Failure to meet this final payment can lead to default and potential loss of collateral, making it essential to approach such loan agreements with caution.
