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 prin-
cipal, which is the amount of the loan, plus the
interest that is owed on it, is divided into install-
ments due at regular intervals—for example,
every month. The earlier installments are usu-
ally payment of interest and a minimal amount
of principal, while the later installments are pri-
marily principal. When a balloon payment is
provided in a loan agreement there are a num-
ber 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 con-
sumers from being victimized by such a loan.
The Federal TRUTH IN LENDING ACT (15
U.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 con-
sumer. The consumer must be informed if refi-
nancing 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 pros-
ecuted and subject to a fine of up to $5,000, one
year’s imprisonment, or both.
Some states restrict the use of balloon pay-
ments to loans involving consumers with irreg-
ular or seasonal incomes. Those states that have
enacted the provisions of the UNIFORM CON-
SUMER 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.
