Balloon Payment

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Related to Bullet payment: balloon payment, Bullet loan

Balloon Payment

The final installment of a loan to be paid in an amount that is disproportionately larger than the regular installment.

When a loan is made, repayment of the principal, which is the amount of the loan, plus the interest that is owed on it, is divided into installments due at regular intervals—for example, every month. The earlier installments are usually payment of interest and a minimal amount of principal, while the later installments are primarily principal. When a balloon payment is provided in a loan agreement there are a number of installments for the same small amount prior to the balloon payment.

People with irregular or seasonal sources of income find a balloon payment provision in a loan useful for budgeting their expenses. This is not the case, however, for the average consumer. Frequently, a consumer is persuaded to enter a loan agreement providing a balloon payment that otherwise would be unwise for her or him. The consumer underestimates the full effect that the balloon payment will have on his or her budget by focusing on the small amounts to be repaid during the early stages of the loan. It is not uncommon for a consumer to be unable to pay the balloon payment when it is due. The consumer is presented with a dilemma: either the consumer must return the item bought with the loan to the lender, thereby losing the money paid out in earlier installments, or the consumer can refinance by taking out an additional loan to use its proceeds to pay the balloon payment.

A balloon payment provision in a loan is not illegal per se. Federal and state legislatures have enacted various laws designed to protect consumers from being victimized by such a loan. The Federal Truth in Lending Act (15U.S.C.A. § 1601 et seq.) requires that a balloon payment—defined as an amount more than twice the size of a regularly scheduled equal installment—must be disclosed to the consumer. The consumer must be informed if refinancing is permitted and, if so, under what conditions. A creditor who fails to disclose such information can be held liable to the consumer for twice the amount of the finance charge, in addition to the costs incurred by the consumer in bringing a lawsuit. He or she can also be prosecuted and subject to a fine of up to $5,000, one year's imprisonment, or both.

Some states restrict the use of balloon payments to loans involving consumers with irregular or seasonal incomes. Those states that have enacted the provisions of the Uniform Consumer Credit Code do not limit the use of balloon payments, but they give the consumer the right to refinance the amount of such payment without penalty at terms no more than those in the original loan agreement.

A balloon note is the name given to a promissory note in which repayment involves a balloon payment. A balloon mortgage is a written instrument that exchanges real property as security for the repayment of a debt, the last installment of which is a balloon payment, frequently all the principal of the debt. Mortgages with balloon payment provisions are prohibited in some states.

Cross-references

Consumer Credit Protection Act; Consumer Protection; Truth in Lending Act.

References in periodicals archive ?
The proposed debentures have a five-year maturity with principal repayment as a bullet payment, and have both fixed and floating coupons, which will be paid on a semi-annual basis.
The notes will bear a semi-annual fixed coupon with a bullet payment without any grace period.
The company said, subject to early redemption, that the principal of the bonds is repayable in a single bullet payment upon the final maturity in August 2017.
The principal will be redeemed in a bullet payment at the maturity of each instrument.
Excess funds that would otherwise be used to trim the size of the senior bullet payments (and thus make final bullet payment manageable) would be funneled off to pay junior debt service.
The principal would be paid at the end of the term in a bullet payment in October 2013.
HIGH DEBT BURDEN: A high pro forma debt burden (which includes a large bullet payment in fiscal 2038) and significant, though declining, variable-rate exposure are partly mitigated by NGF's strong level of balance sheet resources; lack of additional debt needs; and management's conservative financial planning, including recently shifting to a more conservative debt profile.
In recent years, less traditional bond structures have been added to the portfolio, including large bullet maturities, taxable Build America Bonds (BABs), and most recently the issuance of $500 million of GRBs structured as century bonds, with a single bullet payment due in 2111.
HIGH DEBT BURDEN: A high pro forma debt burden (which includes a large bullet payment in fiscal 2038) and considerable variable-rate exposure, are partially offset by NGF's consistently strong level of balance sheet resources and management's conservative financial and budgeting practices.
DIFFICULTY RESOLVING BULLET MATURITY: Inability to obtain affordable market access for a refinancing or the use of reserves to make the 2014 bullet payment could further weaken the financial position of the sewer fund.
Its current GRB financing is structured as a century bond, with a single bullet payment due in 100 years.
The university's current GRB financing is structured as a 100-year century bond, with a single bullet payment of up to $500 million due in 100 years.