What is a balloon payment car loan?
A balloon payment car loan allows you to make lower monthly repayments by deferring a portion of the loan until the end of the term. This deferred amount, known as the balloon payment, falls due as a final lump-sum instalment.
It means your ongoing repayments will be lower, but you’ll likely pay more in interest overall and need to plan ahead for the final payment.
Balloon payments are generally between 20-40% of your loan amount depending on what you agree with the lender.
On the average car loan amount of $33,489, according to the latest Money.com.au data, the balloon payment could range from $6,698 to $13,396.
This is a lot of money to need to part with at once, but most lenders will give you a few options when the balloon payment falls due.
How does a balloon payment work?
A car loan with balloon payment is structured in two parts:
The main portion of the loan
This is the amount you repay gradually through your regular monthly repayments over the loan term (e.g. 5 years). These repayments are lower than they would be on a standard loan because you’re not paying off the full amount from the onset.
The balloon payment
This is the remaining lump sum that’s deferred until the end of the loan term. You won’t make payments toward this portion during the loan, as it’s due in full at the end. When the time comes, you’ll need to either follow the terms outlined in your contract or decide how you want to handle the balloon payment.
The reason you generally pay more interest overall with a balloon payment is you are not paying off as much of the loan balance gradually as you otherwise would be. But you will still be charged interest on the full finance amount throughout the loan.
Detailed breakdown of car loan with balloon payment vs without
Loan amount | |
Car finance with balloon payment | $35,000 |
Car finance without balloon payment | $35,000 |
Loan term | |
Car finance with balloon payment | 5 years |
Car finance without balloon payment | 5 years |
Interest rate | |
Car finance with balloon payment | 7% |
Car finance without balloon payment | 7% |
Balloon payment | |
Car finance with balloon payment | $8,750 (25% of loan amount) |
Car finance without balloon payment | $0 |
Monthly repayment | |
Car finance with balloon payment | $571 |
Car finance without balloon payment | $693 |
Monthly saving | |
Car finance with balloon payment | $122 |
Car finance without balloon payment | $0 |
Total interest paid | |
Car finance with balloon payment | $7,999 |
Car finance without balloon payment | $6,583 |
Total amount repaid | |
Car finance with balloon payment | $42,999 |
Car finance without balloon payment | $41,583 |
Difference in total cost of loan | |
Car finance with balloon payment | +$1,416 |
Car finance without balloon payment | $0 |
| Car finance with balloon payment | Car finance without balloon payment | |
|---|---|---|
Loan amount | $35,000 | $35,000 |
Loan term | 5 years | 5 years |
Interest rate | 7% | 7% |
Balloon payment | $8,750 (25% of loan amount) | $0 |
Monthly repayment | $571 | $693 |
Monthly saving | $122 | $0 |
Total interest paid | $7,999 | $6,583 |
Total amount repaid | $42,999 | $41,583 |
Difference in total cost of loan | +$1,416 | $0 |
What are my options when the balloon payment is due?
You’ll typically have these options when the balloon payment is due at the end of the loan term:
1
Make the balloon payment and keep the car
Your loan is cleared with no more repayments to make to the lender after you make a final balloon payment.
2
Trade in and upgrade your car
A common option is to upgrade your car and make the balloon payment using the trade-in value of the old car.
3
Sell the car
You could choose to simply sell the car and use the proceeds to pay off the balloon amount.
4
Refinance the loan
You may be able to refinance the balloon payment by taking out a new loan and repaying it through regular instalments.
If you’re thinking about a balloon payment car loan, it may be worth speaking to a professional. A car loan broker does more than just find you a good rate. They can help you decide if a balloon payment suits your needs by looking at your finances, comparing options and breaking down the true cost over the loan term.
Balloon payment car loan pros and cons
Pros
- Car loan repayments are reduced - the difference can be significant if you choose a larger balloon payment option
- Frees up cash flow which can be used to help pay off other debts, such as a personal loan or credit card
- Popular choice if you want to upgrade your car regularly where you use the trade-in value to pay out the loan
- Usually available on many types of loans, including used car loans, bad credit car loans, private sale car loans and even for other vehicle types, such as caravans
Cons
- 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
- The balloon payment may come as a shock, especially if life circumstances have changed during the loan term (i.e. house moves, kids, etc.) which could leave you financially unprepared
- It requires a plan for the balloon payment, which might mean setting aside money each month - potentially putting extra pressure on your budget
Should you get a balloon payment car loan?
A balloon payment car loan can be a good option if you’re looking for lower monthly repayments and have a clear plan for covering the final lump sum. For instance, it may work well if you plan to upgrade your vehicle at the end of the term and use the trade-in value to pay off the balloon amount.
If budgeting and setting aside extra cash isn’t your strong suit, this type of loan could be risky. Without a solid plan, the large final payment may catch you off guard, potentially leading to financial stress or the need to refinance on less favourable terms.
Sean Callery, Editor
"While a balloon payment can make sense for individuals financing a car, they are generally more common on business car loans. The reason for this is having lower ongoing repayments means there's less of an impact on the business’ cashflow and the unused funds can be deployed elsewhere. Interest on a business loan is also a tax-deductible expense for eligible businesses, so the higher interest costs with a balloon payment may be less of an issue."
Sean Callery, Editor
What’s the maximum balloon payment on a car loan?
This depends on the lender, but most balloon payments range between 20% and 40% of the loan amount. Some lenders may allow up to 50%, though this is less common. For instance, Pepper Money allows balloon payments only on new, demo or used cars less than 12 months old, and the 50% maximum balloon is only available on loan terms between 1 and 3 years.
While choosing the maximum balloon payment can lower your monthly car loan repayments, it also means you'll face a much larger cost at the end of the loan term. According to Moneysmart.gov.au, although balloon payments may seem appealing at first, you’ll need to repay the lump sum along with interest, which increases the total cost of your loan.
Compare car loans with a balloon payment
Get your best offers from multiple lenders. There's no obligation and checking your rates won't impact your credit score.
