You should use this a balloon payment note when you want to create a shorter repayment period, or when you want to put less burden on the borrower initially to make payments. This arrangement is more common in loans issued by a business than in loans issued by an individual. Some home loans use balloon payments. They are used in business acquisition loans as well, especially when the borrower is a newer business and has little credit history—to give the borrower time to get the business generating more revenue or profit.

A borrower should think hard before signing a promissory note that requires a balloon payment. You have to plan well for that big payment at the end of the term. If you’re not ready for it, you might need to take out another loan to satisfy your note, or you might need to sell the asset that secured the note. And selling that asset could be difficult if it’s value has taken a turn for the worse over the repayment period. So if you’re crafting the promissory note, you’ll just want to be sure that you have a good reason for using a balloon payment, and that your borrower is capable of handling it.

A promissory note with a balloon payment should not only include the amount of the loan and the amount of the periodic payment which should be made, but it should include language stating that a balloon payment will be due at the end of the term. Typically, the balloon payment is equal to the remaining principal and interest due when the Note reaches the end of its term.