A balloon loan is defined as?

A balloon loan is defined as a loan that has a specific amortization but matures prior to the time it is fully amortized. This means that while the borrower makes regular payments as if the loan were to be amortized over a longer period, the actual loan term is shorter. Therefore, the borrower must pay off the remaining balance (the "balloon" payment) at the end of the loan term.

This structure allows borrowers to benefit from lower monthly payments initially; however, it also means they need to be prepared for a significant final payment, which can pose risks if they're not financially ready to pay off the remaining balance at maturity. Understanding this structure is crucial for both borrowers and lenders, as it affects the financial planning involved in taking out such a loan.