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Lets take AES256 as an example. It can encrypt 256 bytes of data at a time, which translates to 64 characters. But the problem with deferring the encryption until the 64th, or generally the Nth, character is:

1) if you do, then the user will not see any of their input until after the Nth character is typed and they're all encrypted at once. This also introduces a problem of "what if N characters are never typed but less than that, should user feedback wait forever?"
2) if you don't and you just pass the N-1 characters to the user before encrypting them all at once on the Nth char, then those characters may have been intercepted by another listening program.
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Your keyboard sends a signal to your CPU when a key is pressed. This signal is processed as an interrupt which means the processor stops everything it's doing and reads the character from the keyboard. All of this is programmed in the code of the operating system you are running, in assembly language. It's not possible to encrypt anything while this assembly code is running because such functions do not exist in assembly.

There is nothing stopping someone from placing assembly code in that position to read the characters to their own memory.