What does a balloon payment indicate at the conclusion of a loan?

A balloon payment indicates that at the conclusion of a loan, a portion of the principal remains unpaid. This type of payment structure is often found in loans with short terms or specific amortization schedules that do not fully pay down the loan balance by the end of the term. Instead of evenly spreading payment over the life of the loan, a smaller installment is made during the loan term, followed by a larger lump sum payment—known as the balloon payment—at maturity, which settles the remaining balance.

This structure can be attractive for borrowers who may expect to refinance or sell the property before the balloon payment is due, but it also entails the risk of needing to make a large payment at the end or potentially facing difficulties in meeting that payment if the borrower's financial situation changes or if market conditions are unfavorable.