What characterizes a balloon payment?

A balloon payment is characterized as a final payment that is significantly larger than the preceding regular payments throughout the loan term. This type of payment structure is often seen in certain types of loans, such as some mortgages or commercial loans, where smaller periodic payments are made, and a much larger amount is due at the end of the loan term.

The design of the balloon payment can provide benefits like lower monthly payments over time, but it also creates a risk for the borrower, as they must prepare for a substantial final payment, which may require refinancing or a lump sum of cash at the end of the borrowing period. Understanding this concept is crucial for borrowers to avoid surprises at the end of their loan term.