What is a “balloon payment” in the context of loans?

A "balloon payment" refers specifically to a large final payment that is due at the end of a loan term. This type of payment structure is often associated with certain types of loans, such as balloon mortgages, where the borrower makes smaller periodic payments throughout the life of the loan, and then a much larger payment is required at the end to pay off the remaining balance. This characteristic can benefit borrowers who anticipate improving their financial situation or selling the property before the balloon payment comes due.

In contrast, the other options describe different concepts. An interest-only payment plan involves making payments solely on interest for a period, not culminating in a large end payment. A payment occurring at the midpoint of the loan term does not encapsulate the essence of a balloon payment, which is defined by its timing at the end. Lastly, a penalty for early repayment does not correlate with the structure of a balloon payment, which is more about the nature of scheduled payments rather than penalties incurred from early loan settlement. Thus, the definition of a balloon payment is accurately captured by the description of a large final payment due at the end of the loan term.