What is a 'balloon loan'?

A balloon loan is characterized by a large final payment that is due at the end of the loan term. This type of loan often involves lower monthly payments for a specific period, after which the remaining balance must be paid in a lump sum. The structure of a balloon loan allows borrowers to manage lower payments initially but requires them to be prepared for a substantial payment at the end, which can be a significant financial consideration.

This type of financing can be appealing for individuals or businesses that anticipate income growth, enabling them to pay off the balance later. However, borrowers must be cautious as they could face difficulties if they are not able to make the final large payment or refinance the loan when it comes due.

The other options do not accurately describe a balloon loan: an interest-only loan requires payments of only interest without a principal repayment structure until a certain date; a loan with no monthly payments isn't standard as most loans involve regular payments; and a fixed-rate loan with no fees typically refers to the interest rate being set without associated fees, which does not relate to the concept of a balloon payment.