What is commonly considered the key feature of a balloon payment?

A balloon payment is characterized by being significantly larger than previous payments made during the life of the loan. This type of payment usually occurs at the end of a loan term, after a series of smaller, regular payments have been made. The structure of a balloon payment is designed so that the borrower pays lower amounts during the term, which allows for better cash flow management, but culminates in a large, final payment that can be a surprise if the borrower is unprepared.

The nature of such a payment typically arises in certain types of loans, including some mortgages and commercial loans, where the initial period may involve interest-only payments or lower principal payments. This design serves specific financing strategies but necessitates careful planning by the borrower to ensure they can handle the larger payment when it comes due.