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Balloon Payment & Calculator

What is a Balloon Payment on a Car Loan?

A balloon payment is a designated lump sum (from the car loan amount) due to be paid at the end of the loan. By setting this Balloon Payment option, the borrower is able to reduce the repayments of the car loan. This is in exchange for owing a large sum of money when the loan matures.

What is the Benefit of a Balloon Payment?

A Balloon Payment at the end of the loan reduces the repayments on a car loan. This can free up some capital for the borrower to utilise during the life of the loan.

A savvy investor could make use of this freed up capital in areas where they may get a greater return. For instance, they could have an investment that pays higher interest than what they’d be paying on the car loan.

More often, small businesses and sole trader make use of balloon payments on a business car loan to help their cash flow. They can keep their repayments low and hold back the balloon amount to use in their business.

Balloon payments also suit car owners who like to upgrade their vehicle at the end of the loan period. They can then sell the vehicle at the end of the loan term and pay out the balloon amount.

What Happens When a Balloon Payment is Due?

When a Balloon Payment is due you generally have two options:

  1. You can pay the lump sum payment if you have the money. This marks the end of the loan and the car is now owned by you entirely.
  2. Your other option is to take out a second loan to cover the Balloon Payment and continue making payments. If this is your plan it is advisable that you start looking for a loan a few months before the Balloon Payment is due to ensure you do not default.

Residual Payments VS Balloon Payments

When looking at your loan options you might hear the term residual payment. This is not the same as a balloon payment. Both are paid at the end of a loan but that's where the similarity ends. A residual payment is usually attached to a car lease not a car loan. This residual payment is the amount you will have to pay to own the car at the end of the lease but this amount is based on the current market value of the vehicle. Depending on the terms of your lease contract you may be able to choose to purchase the vehicle or not. This is definitely not the case with a balloon payment.

In contrast a balloon payment is a fixed percentage of the total loan that must be paid at the end of the loan aggreement. It has little to do with the actual value of the car itself.

If you have more questions regarding Balloon Payments, contact our CarFinance.com.au experts on 1300 880 078 today.

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