A balloon payment refers to the final lump sum payment that becomes due at the conclusion of a loan agreement. Loans featuring a larger balloon payment typically offer lower regular repayments throughout the loan term.

This financial arrangement allows borrowers to manage their cash flow more effectively during the loan period, as they make smaller, regular payments. The balloon payment, often substantially larger than previous installments, is a predetermined amount that serves to settle the remaining balance of the loan. This type of structure is commonly employed in various financing contexts, including mortgages and car loans.

While balloon payments offer initial cost relief, borrowers must prepare for the substantial final payment, requiring financial planning to ensure timely settlement and prevent default.

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