A promissory note with balloon payments is a legal instrument that documents one person’s promise to pay a sum of money to another based on a repayment schedule that requires a large payment at the end of the term.
- Loaning money that you that you want returned slowly over time followed by a lump-sum payment at the end of the loan term
- Borrowing money under terms requiring low monthly payments followed by a lump-sum payment at the end of the term
A promissory note records a financial transaction that involves repayment upon a debt. The promissory note will include all relevant details of a debt, including the date by which the debt must be repaid, any fees or interest that may apply, the parties involved in the transaction, and all other terms and conditions of the loan. Sometimes lenders offer repayment terms that involve low monthly or weekly payments in exchange for a large “balloon” payment at the end of the term. This type of agreement is formalized using a promissory note with balloon payments. A promissory note with balloon payments documents in writing your intent to repay a loan by making low payments over time followed by a large payment when the balance becomes due. This provides some additional flexibility to a borrower who may be working to raise capital or build equity over the term of the loan. Promissory notes with balloon payments may be negotiated on a payment scale, but the borrower bears the risk of losing the equity they had paid into the property if they are unable to make the balloon payment at the end of the term. Regardless of whether you are the borrower or the person making the loan, promissory notes are an effective way to formalize a repayment agreement between two parties. Many common financial transactions, such as taking out a mortgage, require a promissory note as a matter of law or best practice, so a promissory note is a financial instrument that everyone should be aware of.