What is a balloon payment?
If you want to buy a car, truck or motorbike, but you can’t quite afford the full loan repayments right now, you might want to consider a balloon payment.
A balloon payment car loan allows you to make smaller monthly repayments for the life of the loan.
“What’s the catch?” you ask.
Well, in return for making those smaller monthly repayments, you’ll have to make an additional one-off payment at the end of the loan. This is known as the balloon payment.
Also, you’ll generally pay more interest over the life of the loan with a balloon payment car loan than with a standard car loan.
So the trade-off is this:
- Standard car loan – pay more per month but less over the life of the loan
- Balloon payment car loan – pay less per month but more over the life of the loan
What is a balloon payment on a car loan?
When you take out a balloon payment car loan, you agree to pay a percentage of the loan as a lump sum at the end of the loan.
The balloon payment percentage is negotiable – it depends on your preferences, the age of the vehicle and the lender’s credit criteria. Most lenders cap balloon payments at a maximum 50% of the total loan amount.
If you had a 50% balloon on a $30,000 vehicle loan, you’d have to pay a balloon payment at the end of the loan of $15,000.
Balloon payment loan example
Imagine you took out a $35,000 car loan with an interest rate of 5% and a loan term of five years.
Here’s how much you’d pay in three different scenarios – a standard car loan, a car loan with a balloon payment set at 30% and a car loan with a balloon payment set at 50%.
Standard car loan
Balloon payment car loan (30%)
Balloon payment car loan (50%)
Balloon payment at end of loan
The standard car loan would save you $2,060 over the life of the loan, compared to the 50% balloon car loan.
However, the monthly repayments would be $257 less with the 50% balloon car loan compared to the standard car loan.
Balloon payment advantages and disadvantages
The advantage of a balloon payment car loan is you have lower monthly repayments. This can be helpful if money is tight when you take out the loan – if you’ve just made a big purchase, for example, or you’re repaying another loan.
The disadvantage of a balloon payment car loan is you’ll probably end up paying more over the life of the loan. You also need to make sure you have enough money to make the balloon payment at the end of the loan – which might be tricky if your finances were stretched in the first place.
Can you refinance a balloon payment?
Yes, it is possible to refinance your balloon payment – some lenders offer this option.
However, you can’t take refinancing for granted. If you apply for a balloon refinance, lenders will treat this like any other loan application, and use the usual loan assessment criteria.