If you’ve been researching car finance and come across the term “balloon payment,” you’re not alone in wondering exactly what that means. On paper, a balloon payment loan can look appealing. They come with lower regular repayments, and for many buyers, that’s the breathing room they’re after.
But there’s more to it than meets the eye. Balloon payments can either simplify your monthly budget or create a tricky situation down the track, depending on how well they fit your financial goals.
Here’s how they work, who they’re best suited to, and what to keep in mind before deciding if one’s right for you.
What is a Balloon Payment?
A balloon payment is a lump sum payment you agree to make at the end of your car loan. It’s typically much larger than your regular repayments and can make up 20 to 50 percent of the car’s value, depending on the lender and loan term.
So, how does a balloon payment work? Instead of paying off the full loan amount evenly, your monthly repayments are based on a smaller portion of the loan. The remaining amount is pushed to the end, where you’ll settle it in one go.
For example, if you’re buying a car for $40,000 and agree to a balloon of $10,000, your repayments are calculated based on the remaining $30,000. That means you’ll pay less each month, with the trade-off being a larger amount to deal with at the end of the loan.
Why Choose a Balloon Payment?
The biggest advantage of a balloon loan is the reduced monthly cost. It can make it easier to fit your repayments into the household budget, especially if you’re already juggling other expenses or running a business.
Some borrowers use the extra room in their budget to set aside funds for the balloon over time. Others plan to sell or trade in the vehicle at the end and use the proceeds to pay off the remaining balance.
Balloon payments are also popular with drivers who like to upgrade their car every few years. This approach gives you more flexibility and helps you avoid being locked into long-term ownership.
What Are the Risks?
While the lower repayments can help in the short term, the catch is what happens at the end. A balloon payment can be thousands or even tens of thousands of dollars, depending on the original balloon payment loan amount and structure.
If you haven’t planned for it, or if your car has depreciated more than expected, that lump sum can be a real problem, and you might even find yourself in negative equity, owing more on the car than it’s worth.
You’ll also likely pay interest on a larger portion of the loan for longer, since the principal is paid down more slowly, meaning the total cost of the loan can be higher in the long run.
What Happens When the Balloon Payment Is Due?
When the end of your loan term rolls around, you’ve got a few options:
- Pay it in full. If you’ve saved up or come into extra funds, you can clear the remaining balance and keep the car outright.
- Sell the car. Many borrowers choose to sell the vehicle and use the proceeds to cover the balloon, then start fresh with a new car or loan.
- Trade it in. If you’re planning to upgrade, most dealers will apply the trade-in value toward your balloon and set you up with a new finance deal.
Depending on your situation, refinancing the balloon may be one option, but if you prefer to avoid large end-of-term costs altogether, it might be worth comparing other finance structures. A novated lease could offer a simpler alternative, especially if your employer offers salary packaging and you’d prefer an all-in-one monthly cost that covers running expenses too.
Who Are Balloon Payments Best For?
A balloon payment car loan tends to suit small business owners and sole traders who want to keep their monthly repayments low and reinvest the savings elsewhere. It can also work well for drivers who prefer to change cars regularly and don’t plan to keep their vehicle beyond the loan term.
For business buyers, balloon payments are often paired with a chattel mortgage, where the car is used as security for the loan. This structure can offer tax benefits and lower interest rates, especially when the vehicle is primarily used for business purposes.
On the other hand, if you’re planning to hang onto your car long after the loan ends or you’re unsure how you’d manage a large final payment, a more traditional loan might be a safer bet.
Ready to Take Flight? Let Credit One Guide You To the Right Car Loan
If you’re weighing up a balloon payment or just trying to figure out what kind of car finance suits your situation, we’re here to help. For ABN holders, our car loan guide for small business owners is a great place to start, and you can also explore the types of business car loans available to see what fits your needs best. When you’re ready to run the numbers, try our loan calculator, or skip straight to our easy online loan application and we’ll help you find a smart, flexible car loan with none of the guesswork.
