A balloon payment, sometimes called a residual, parks part of a loan’s balance at the end of the term. Because that chunk is not being repaid along the way, the regular repayments are lower; because it stays owing for the whole term, the total interest is higher.
Balloons are common in car finance, where the planned exit is often selling or trading the car and clearing the balloon from the proceeds. The risk in that plan is the gap: if the car is worth less than the balloon when the day arrives, the difference comes out of your pocket.
The three workable exit plans are paying it from savings, selling the car to clear it, or refinancing it into a new loan. A balloon signed without one of those plans attached is how the product earned its reputation.
Always compare balloon offers by total amount payable with the balloon included, not by the repayment. The worked arithmetic is in our guide to balloon payments.