A guide to car loan balloon payments

Shopping around for car loans can be confusing, especially when lenders start mentioning “balloon payments” as a way to keep your monthly repayments down.

But what is it, how can it help you, and is it better value than other payment options?

Our guide explains below.

If you’re looking to buy a car, chances are you’ll come across some financing options that include a balloon payment.

Balloon payments can make your weekly, fortnightly or monthly car loan repayments more affordable, but you also need to remember you’ll have to pay off 30% to 50% of the loan at the end of the loan term.

That’s why it’s worth comparing different loan options to find one that fits your financial situation now, and in the future.

But what exactly are balloon payments, and is this repayment feature right for you?

This guide covers everything you need to know.

What is a balloon payment and how does it work?

It might sound like something you’d find at a kid’s party, but a balloon payment is actually a lump sum you agree to pay at the end of a car loan term.

Balloon payments are an optional feature of some car loans, and usually make up a big part of the total loan amount (about 30-50%).

So, for example, if you had a five-year $20,000 car loan with a 30% balloon payment, you’d need to pay $6,000 as a lump sum at the end of the loan.

Because the balloon is a large portion of your loan, your ongoing monthly repayments are reduced.

Balloon payments can make your loan more expensive overall, because your monthly repayments make up a smaller percentage of your total loan amount.

That means you end up paying more interest as well as having to have the cash ready for a lump sum payment at the end of the loan term.

That said, if you want to reduce your repayments and are happy to pay a lump sum later on, you may consider a balloon payment.

However you want to pay, by shopping around, you could find better rates and features on a car loan than your average lender – and save big bucks.

Why do car loans have balloon payments?

There are lots of features available with car loans, and balloon payments are just one of them.

Car loans with balloon payments tend to be more commonly offered through smaller lenders rather than the big banks.

Lenders want to appeal to different types of borrowers, and balloon payments may be particularly helpful for people who prefer to reduce their weekly or monthly car repayments.

When should a balloon payment be used?

Generally speaking, a balloon payment can be beneficial in situations where you want to keep your repayments low and don’t mind paying a lump sum later on.

This could include:

• When you want to reduce your car repayments to better fit your current budget.

• When you plan to sell your car later on to pay off the balloon payment.

• When you’re a sole trader or small business owner and want to free up cash flow.

What are the benefits of a balloon loan?

Some potential benefits of a car loan with a balloon payment include:

• Reduced weekly or monthly repayments. Because part of your loan gets paid as a lump sum at the end, your repayments are more affordable.

• More cash on hand. With reduced repayments, you may have more cash available for other purposes.

• Flexibility. Some lenders give you the option of selecting your own balloon payment amount, so you can choose a balance that’s right for your finances.

What are the risks of a balloon loan?

The main potential risks of choosing a car loan with a balloon payment include:

• You could end up paying more. The cost of a balloon loan can be higher in the long run, when compared to a non-balloon loan with the same rates and fees.

• There’s a lump sum to pay at the end. Unless you plan to sell the car, you’ll need to have money set aside to pay the balloon when it’s due.

• Reduced market value of the car. The car may not be worth the value of the balloon payment when it’s due, which means even if you sell it you may have to pay the difference out of pocket.

• You might not have enough for your next car. If you are relying on selling the car to offset the balloon payment, this may reduce the deposit you have for your next vehicle.

Can I trade in my car with a balloon payment?

Yes, you can trade in your car before you’ve made the balloon payment.

But keep in mind you’ll still need to pay off the rest of the loan including the balloon payment.

You might prefer to use some of the car’s trade-in value to pay off the loan.

How can I pay off my balloon loan early?

One potential way to avoid paying added interest on a balloon loan is to pay it off early.

There are a few ways you might be able to do that:

• Pay your loan balance in full. Some lenders offer the option to pay off your car loan early, which could help you save on interest.

• Sell or trade in your car. If you decide to sell your car before your loan term is finished, some or all of this money could go towards your balloon payment.

• Make extra repayments. Even if you can’t pay off your balloon payment in full early, you might be able to make extra repayments or increase the repayments on your loan. Not all lenders offer this, so it’s worth keeping an eye out for those features when comparing car loans.

What happens if you don’t pay the balloon payment?

If you don’t pay the balloon payment when it’s due, your lender could potentially repossess your car (if it’s a secured loan) or send your repayment to collections (if it’s an unsecured loan).

Either situation will most likely hurt your credit score.

If you can’t afford to make the balloon payment when it comes up, selling or trading in the car could be an option.

With that approach, you might be able to use the money to pay the balloon payment.

You could also potentially look at refinancing the balloon payment amount with another lender.

You’ll still need to pay it off, but it will be broken down into smaller repayments like a standard loan.

Where can I find a loan with a balloon payment?

Not every lender offers car loans with balloon payments, but there are plenty of options available.

Compare Club’s specialists can help.

We’ll look at your finances and the available loans to help keep your repayments down, even without a balloon loan.

We make it easy to compare car loans from multiple lenders side-by-side – so you can find one that’s the right fit for your finances.

Get started by clicking the button below.

Like any financial decision, it pays to do your research and compare your options before choosing a car loan.

This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.

Compare Club has partnered with CarClarity, Australian Credit License 478 874.

CarClarity has commercial relationships with over 30 car finance lenders & has access to over 1000 car finance plans, however, does not compare all car finance offers in market. Availability of lenders and products can vary dependent on the individual’s personal credit history and circumstances. CarClarity & Compare Club may receive a commission from the lender to provide this service.