In a loan with a balloon payment, what typically happens at the end of the loan period?

In a loan with a balloon payment, the key feature is that a large payment, usually the remaining principal balance, is due at the end of the loan term. This structure means that during the course of the loan, the borrower may make regular, smaller payments that do not fully amortize the loan. As a result, these payments cover interest and possibly a portion of the principal but leave a substantial portion of the principal unpaid until the final payment is due.

The balloon payment represents this remaining balance, and borrowers must be prepared to pay it in full at the end of the term. This feature can make balloon loans attractive for short-term financing needs but also raises the risk of needing to refinance or otherwise secure funds for that large final payment.

The other options do not align with the way balloon loans operate. Continuing payments indefinitely would not conclude the loan, and reducing payments wouldn't apply once a payment is due. Lastly, an automatically forgiven loan is not a standard practice and doesn’t apply to balloon loans, as they typically require the final amount to be paid. Therefore, understanding the nature of balloon payments highlights why the principal balance being due at the end is the defining characteristic of such loans.