In our car loan balloon payment guide:
A car loan balloon payment is a large one-time repayment you make at the end of your loan term. Instead of paying off the full loan amount gradually through regular repayments, a chunk of it is deferred until the end of the loan term.
This portion of the loan becomes the balloon payment. It's generally between 20-40% of your loan amount depending on what you agree with the lender.
On the average car loan amount of $34,827, according to Money.com.au data from 2023, the balloon payment could range from $6,954 to $13,931.
But remember, this payment will likely be optional. Most lenders will give you a few options when the balloon payment falls due. I’ll explain these below.
The big advantage with this setup is your regular repayments will be lower. Because they will exclude the balloon payment amount.
On the downside, you’ll still be charged interest on the balloon payment amount the whole way through your loan term. So a car loan with a balloon payment can work out more expensive overall, compared to a loan without one.
Let’s look at why this is the case and some of the other pros and cons.
A car loan with balloon payment is essentially split into two parts.
Because of the split, the monthly repayment is less on a car loan with a balloon repayment.
Here’s a hypothetical example to illustrate the difference between a car loan with and without a balloon payment.
|Car loan with balloon payment||Car loan without balloon payment|
$7,500 (25% of loan amount)
Total interest cost
Total to be repaid
Difference in cost
Here are the options you’ll typically have:
Number one on the list is a biggie. Allocating a large amount of your loan into a single, final payment means all of your regular payments up until that point will be drastically reduced. Get an estimate of your regular loan repayments based on different loan amounts using our car loan calculator.
Particularly in business car finance, but not uncommon with personal car loans, lower repayments because of a balloon payment can free up your cash flow.
This could allow you to use the money you’re not spending on the car loan for something more productive. Alternatively, it could bring the super-safe family vehicle you’ve been wanting — or just a slightly newer model of car — into reach.
A balloon payment can also be a useful option if you plan to regularly upgrade your vehicle. Instead of making the balloon payment, you use the trade in value of your vehicle to pay out the loan. If you’re planning to salary package a vehicle using a novated lease, you’ll find this a very common situation.
You're not limited to a standard car loan if you're considering a balloon payment. You can typically get this option with the likes of used car loans, bad credit car loans, low doc car loans, private sale car loans and even for other vehicle types, such as with caravan finance.
While the regular repayments will be lower, factoring in the balloon payment at the end means a car loan financed this way could end up a more expensive option overall.
Even though it’s what you’ve signed up for, that was five years ago. A lot could have happened in the meantime (house moves, kids etc. etc.). And now there’s a chance you’re not really prepared for the big financial outlay to cover the balloon payment.
Going the balloon payment route requires planning and budgeting for this big payment so you’re not ultimately forced to sell your car or take on another loan to repay the balloon amount.
If you're unsure about whether it's the right option for you, consider speaking to a qualified expert such as a financial advisor or an independent car loan broker.
It's generally possible to refinance the balloon payment on a car loan. This essentially means you extend your loan and pay off the balloon amount gradually (or you could refinance the ballon amount to a different lender). This can make the balloon payment more manageable by spreading it out, but it means you will continue to be charged interest and potentially fees too.
This depends from one lender to another but as a general rule the balloon payment on a car loan is rarely more than 40% of the loan amount.
Not all lenders offer a balloon payment option. For example, it's less common among major banks and credit unions. But most specialist car finance providers and a lot of smaller online lenders do offer a balloon payment option.
If you can't afford the balloon payment on your car loan, you may have the option of refinancing it. This would mean that instead of paying it all at once, the payment is spread over a new finance term, e.g. 12 months. It's best to discuss this with your lender to understand what options you have available.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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Where to next? Read our other car loan guides to understand more about your options for financing your next car.
*Information about comparison rates Comparison rates are designed to allow borrowers to understand the true cost of a loan by taking into account fees and charges, the loan amount and the term of the loan. The comparison rate is based on an unsecured fixed rate personal loan of $30,000 over 5 years. WARNING: Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.