Balloon Payment


Also found in: Dictionary, Medical, Financial, Wikipedia.

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 ?
This assists customers preferring a small deposit, with 36 monthly payments from just pounds 149 for Swift SZ2 and a final balloon payment to keep the car at the end of the agreement.
The remaining cost is spread over the term of the contract, or you can pay lower monthly rentals and a final balloon payment at the end of the term.
In response to feedback stating appraisals should be required only when there is unequal or graduating amortization, the FSA disagreed, stating that "an appraisal will always be necessary when restructuring with a balloon payment in order to provide some assurance that there is adequate security for the debt.
A $3,000 auto title loan will require the consumer to pay $400 monthly for seven months and then a $3,000 balloon payment in the eighth month.
The latter can be accomplished either by making larger payments after the employee returns to work, or the employee can continue to pay the same amount as prior to the leave, then make a balloon payment at the end.
Luckily, the mortgage banker arranged a loan that paid off the balloon payment and refinanced what was still owed on the house.
Fitch also assessed borrower and balloon payment concentrations over the life of the transaction.
The IRS indicated that, as a matter of "administrative convenience" it would allow the rule of 78's for certain short-term consumer loans only when there was a self-amortizing loan that required level payments (at regular intervals at least annually) over a period not in excess of five years (with no balloon payment at the end of the loan term) and when the loan agreement between the borrower and the lender provided that interest was earned (or when the prepayment of the loan interest was treated as earned) in accordance with the rule of 78's method.
7%) as a result of the borrowers failure to make their balloon payment at maturity.
For instance, if a borrower wants to put debt on a property for two years, there are terms ranging from five, seven and ten years on a 25-30 year amortization schedule, with a balloon payment at the end of the period.
The balloon payment was paid earlier than the December 1994 due date to permit the company's management to focus on longer term strategic issues.
No further payments were required until 30 years from the date of purchase, at which time U either forfeited its interest in the units (because the debt was non-recourse) or made a balloon payment of $86,700 per unit.