Your guide to car loan balloon payments
Estimated read time: 5 Minutes
There are plenty of loan options to finance your dream car – choosing the right one can be tricky. Here we provide a guide to the ins and outs of balloon payments, their pros and cons and how a balloon payment could suit your car loan requirements.
What do balloons have to do with car loans?
If you’re in the market for a car loan, you may have come across the term ‘balloon payments. While it might sound strange, it’s important to understand what it means and how it works before you choose your car loan. So let’s take a look.
What is a balloon payment?
How does a balloon payment work?
A balloon payment is set as a percentage of your total car loan amount. You may be able to negotiate the lump sum amount with your lender. It’s determined at the outset of your loan and is part of your loan agreement with a lender.
For instance, you might need a $20,000 loan to buy your dream car. You negotiate your balloon payment to be 30% of the total loan – or $6,000. So the remaining loan amount is $14,000.
At a 7.48% p.a. interest rate, estimated monthly repayments of the $14,000 over five years would be $318*.
This means you’ll pay $318 monthly for 4 years and 11 months and a lump sum of $6,000 in the last month. You will pay $5,068 of interest over the loan term.
Without a balloon payment, your monthly repayments would be $401 – but you’re interest costs would decrease to $4,034.
| With balloon payment | Without balloon payment |
Loan amount | $20,000 | $20,000 |
Loan term | 5 years | 5 years |
Interest rate | 7.48% | 7.48% |
Balloon payment | $6,000 | N/a |
Monthly repayment | $318 | $401 |
| Total interest paid (over loan term) | $5,068 | $4,034 |
You can calculate interest rates, repayments and balloon payments for your car here.
The benefits of choosing a car loan with a balloon payment?
Balloon payments can help reduce the weekly or monthly repayments of your car loan – helping you stick to your budget.
Let’s take the above example. A balloon payment saves you $83 each month on repayments, which can help if you’re on a tight monthly budget. You can use the extra money on other expenses such as groceries or bills – or to save up for the balloon amount over the life of the loan.
But keep in mind you will need to make a larger lump sum repayment at the end of the loan term – and you will pay interest on the balloon payment over the loan term.
The disadvantages of balloon payments?
A balloon payment can cost you more over the life of your loan because you pay interest on the balloon payment over the loan term and if you don’t have the cash to payout the balloon payment you may need to take out a loan for the balloon payment. While you save on your regular repayments, the trade-off is that you’re paying off less than the total loan amount over the loan term – and paying interest on the (larger) amount still owing.
You will also need to have the lump sum payment ready at the end of your loan, which could end up being something else you have to save for or finance.
Balloon payments are usually available on new or near new cars. They may not be an option on an older vehicle.
What’s the difference between a balloon payment and residual payments?
Both balloon and residual payments refer to the lump sum amount that is payable at the end of your loan term – but they’re calculated differently and serve a different purpose.
Who could consider a balloon payment for their car loan?
If you like to upgrade your car every few years, a balloon payment could be an option that suits your needs. Selling or trading in your car allows you to payout the balloon payment at the end of the loan term and buy a new car through a new loan or with cash.
Car Loans with a balloon payment could also benefit sole traders or small business owners, as they can free up cashflow and allow you to invest the money back into your business.
What are my options at the end of the loan term?
Depending on your circumstances, there are several things you can do when your balloon payment is due.
Pay off your loan
Sell your car
Trade in
Refinance
Can I trade in my car with a balloon payment?
Yes, you can. Trading in your car works much like selling it with a balloon payment.
You may choose to trade it in at a time when the value of your existing car is a similar value to your balloon payment. This would mean you will have little or nothing to pay on your existing loan unless there is an existing loan balance.
Can you pay off a balloon loan early?
This will depend on your lender.
At Pepper Money, our car loans put you in the driver’s seat. So you can repay your Pepper balloon loan before the end of the loan term, if you choose. We do charge an early exit fee.
Ready to get things moving? Explore our car loan options now.
Contributor | Andrew Gamble, Head of Sales - Asset Finance
Andrew brings more than 20 years of experience in the finance industry. His strategic vision, leadership and his customer centric approach has contributed to the significant growth of Pepper Money's Asset Finance business. Read more.
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