A large final payment due at the end of a loan term, typically much larger than the regular periodic payments. This structure allows for lower monthly payments throughout the loan term but requires a substantial sum at maturity.
The term 'balloon' in this context comes from the visual metaphor of something that suddenly expands or inflates dramatically. First used in American banking in the early 20th century, it describes how the final payment 'balloons' compared to regular installments.
Balloon payments are like financial time bombs that can catch borrowers off guard - they're often used in commercial real estate where the assumption is you'll refinance before the balloon comes due. Many financial crises have been triggered when multiple balloon payments came due simultaneously and refinancing wasn't available!
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