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A Balloon Payment occurs when the payments on a loan are amortized over a longer period than the term of the loan. A loan may have a term of 3, 5, 7, or 10 years, while payments are amortized over 20 to 30 years. In this case, the final payment required to pay the loan off is called a "balloon payment" because it is higher than the previous payments.

Amortization is the rate at which principal is paid down on a loan. A fully amortizing loan would have all of the principal paid down to the end at the last payment. But in the commercial world, lenders typically don't want to make 25 or 30 year loans. So quite often in commercial lending, we see loans that have partial amortization.

Commercial lenders typically prefer to make 3, 5, 7, or 10 year loans. Not always, but often. However, if payments were amortized over, just say 10 years, then they would be astronomically high, and borrowers wouldn't be able to afford the payments and still have positive cashflow. So what's a very common is lenders will make a shorter term loan, but amortize the payments over say 25 or 30 years.

The advantage of this is that it reduces the monthly burden and increases the cashflow for the borrower. So at the end of the loan term, the borrower ends up with what's called a balloon payment, and that balloon payment is just simply paying one last final payment that pays down the rest of the entire loan balance on the final payment.

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