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Balloon Payment

The phrase balloon payment or bullet payment refers to one of two ways for repaying a loan; the other type is called an amortizing payment. A balloon payment is made when the loan comes to its contractual maturity, e.g. reaches the deadline set to repayment at the time the loan was granted, representing the full loan amount (also called principal). Periodic interest payments are generally made throughout the life of the loan.
Bullet payments introduce a certain amount of risk for the borrower and the lender. In many cases, the intention of the borrower is to refinance the amount of the balloon payment at the final maturity date. Refinancing risk exists at this point, since it is possible that at the time of payment, the borrower may not be able to refinance the loan; the borrower faces the risk of having insufficient liquid funds, and the lender faces the risk that the payment may be delayed.