What are balloon payments in the context of loans?

In the context of loans, balloon payments refer to payments made at the end of the loan term that exceed the regular periodic payments. These payments are typically much larger than the regular payments made throughout the life of the loan. The structure of a loan that includes a balloon payment usually involves lower monthly payments for a significant portion of the loan term, followed by a substantial single final payment.

This type of payment structure can be beneficial for borrowers who want to maintain lower monthly payment amounts for budgeting purposes but need to be prepared for a larger payment at the end of the term. The concept is important to understand, especially for mortgages and other long-term loans, as it impacts the overall cost of borrowing and the borrower’s financial planning.

The other options describe different types of payment structures. Regular small payments or fixed monthly payments do not involve a significant final payment, while payments that include insurance costs refer to additional expenses associated with the loan rather than the nature of the payment structure itself.