Home > West's Encyclopedia of American Law > 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...