- Balloon payment
The phrase balloon payment or bullet payment refers to one of two ways for repaying a
loan; the other type is called "amortizing payment" or " Amortization (business)".
With a "balloon loan", a "balloon payment" is paid back 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.
In contrast, with "amortization", portions of the principal are periodically being repaid (along with the loan's
interestpayments) until the loan matures. With "full amortization", the amortization schedule has been set so that the last periodical payment comprises the final portion of principal still due. With "partial amortization", a balloon payment will still be required at maturity, covering the part of the loan amount still outstanding.
Balloon payments or bullet payments are common for certain types of debt. Most bonds, for example, are non-amortizing instruments where the coupon payments cover interest only, and the full amount of the bond's
face valueis paid at final maturity.
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 riskexists 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.
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