Balloon note is a long term loan that has one large payment due upon maturity. A balloon note has low interest payments and requires very little capital outlay during the life of the loan. Since most of the repayment is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the available capital during the life of the loan. Balloon notes are often undertaken when refinancing or when a major cash flow event is anticipated. It is also called bullet loan or balloon loan.
Balloon notes are often utilized within business operations. It provides a corporation with a relatively low amount of resources required to meet the monthly obligation of the loan. At the same time, the balloon note arrangement provides the company with time to build up additional resources that can be used to retire the debt when it comes due. Along with long-term loans to businesses, the balloon note is sometimes used in real estate as well. A mortgage can be arranged to include balloon payments. This is typically structured to allow for a series of reduced monthly payments, capped off with one large balloon payment at the end of the mortgage period.