When a debt is repaid in payments of varying amounts there are some colourful jargon terms used to describe the different loan structures. The term balloon payment arises because if you hold back most of a debt and pay it only towards the end of the agreement, both those last payments and the total amount repaid are much larger. The debt is inflated like a balloon due to Compound Interest

Compound interest

Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding...

 accumulating on the large sum. This is more technically known as partial amortization.

A related piece of jargon is the bullet payment. When a large debt has to be repaid entirely in one big payment it can be financially crippling, making it a metaphorical bullet to the head of a company which doesn't have the cash to hand.

With a bullet loan

Bullet loan

In banking and finance, a bullet loan is a loan where a payment of the entire principal of the loan, and sometimes the principal and interest, is due at the end of the loan term. Likewise for bullet bond...

, a bullet 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.

The more usual arrangement for repaying a loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

 is called amortizing payment or amortization

Amortization (business)

In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of intangible assets.-Amortization of loans:...

.

With amortization, portions of the principal are periodically being repaid (along with the loan's interest

Interest

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 payments) until the loan matures. With full amortization, the amortization schedule

Amortization schedule

An amortization schedule is a table detailing each periodic payment on an amortizing loan , as generated by an amortization calculator. Amortization refers to the process of paying off a debt over time through regular payments...

 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. This approach is very common in automotive financing where the balloon payment is often calculated with respect to the value of the vehicle at the end of the financing term - so the borrower can return the vehicle in lieu of making the balloon payment.

Balloon payments or bullet payments are common for certain types of debt. Most bond

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

s, for example, are non-amortizing instruments where the coupon

Coupon (bond)

A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and...

 payments cover interest only, and the full amount of the bond's face value

Face value

The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...

 is paid at final maturity.

Balloon 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

Refinancing risk

In banking and finance, refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. Many types of commercial lending incorporate balloon payments at the point of final maturity; often, the intention or assumption is that the borrower will take out a new...

exists at this point, since it is possible that at the time of payment, the borrower will 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.