A long-term loan, often a mortgage, that has one large payment
(the balloon payment) due upon maturity. A balloon loan will often
have the advantage of very low interest payments, thus requiring
very little capital outlay during the life of the loan. Since most of
the repayment is deferred until the end of the payment period, the
borrower has substantial flexibility to utilize the available capital
during the life of the loan. The major problem with such a loan is
that the borrower needs to be self-disciplined in preparing for the
large single payment, since interim payments are not being made.
Balloon loans are often undertaken when refinancing or when a major
cash flow event is anticipated. also called balloon note or bullet
loan.