Balloon Payment: What It Is and How It Works

By Kristi Waterworth – Updated Jul 22, 2025 at 1:51 PM EST | Fact-checked by Frank Bass

Key Points

Balloon payments are large, end-of-term payments on loans that only partially amortize over their term.
These loans can increase initial purchasing power but risk foreclosure if the balloon payment isn't met.
For investors, understanding the use of balloon payment loans is crucial due to their default risk.

Although common consumer loans have equal payments that ultimately end in the loan being paid in full, that's not always the case with lending. Sometimes, a balloon payment is required. Read on to understand what this is, why you'd have one, and the pros and cons of using one of these loans.

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Piggy bank floating in the sky tethered to a green balloon — Balloon and piggy bank floating away

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If you're a stock investor and your company is using a lot of loans with balloon payments to finance purchases, this might be more of a strategic move, especially if they have a lot of cash on hand. Generally, companies that are institutional-grade investments have a plan for refinancing loans or have non-bank credit they can tap to refinance property acquisitions that have a balloon payment due. Small caps and micro caps, though, may be at serious risk of loss since they can't access a lot of the types of credit that larger companies can.

One other place balloon payments could come into play is when buying mortgage backed securities (MBS). These are made of all kinds of mortgages, including mortgages with these features. When you buy an MBS that has mortgages with balloon payments included, you may get a higher return, but it's due to the higher risk of default.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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