A balloon loan is a type of loan that does not fully amortize over its term, meaning that it requires a large final payment, called a balloon payment, to repay the remaining balance at the end of the term. Balloon loans are structured in a way that the payments are either interest-only or a mix of mainly interest and some principle for a set number of payments, and the remainder of the loan is due at once in the balloon payment. Balloon loans are more common in commercial real estate than in residential real estate today due to the prevalence of mortgages with longer periods of amortization, in particular, the 30-year fixed-rate mortgages. Balloon payments or bullet payments are common for certain types of debt, such as most bonds, where the coupon payments cover interest only, and the full amount of the bonds face value is paid at final maturity.

Balloon loans can offer flexibility in the initial loan period by providing a low payment, but they can also be risky for both the borrower and the lender. Borrowers should have a plan to pay the remaining balance or refinance before the payment comes due, and they should be aware of the underlying risk of opting for a balloon loan. Its easy to be tricked by the small size of the original interest-only (or mostly) monthly payment into borrowing more money than an individual can comfortably afford to borrow, which can lead to financial ruin. Balloon payments introduce a certain amount of risk for the borrower and the lender, and in many cases, the intention of the borrower is to refinance the amount of the loan.

Industries that use balloon loans include construction and home flipping. Balloon loans can be structured in several ways, and they have some downsides, such as higher rates and difficulty refinancing. Balloon payments are not allowed in a type of loan called a Qualified Mortgage, with some limited exceptions.