Car loans with balloon payment
- A type of car loan with a large one-off payment at the end
- An option for reducing your regular loan repayments
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What is a car loan balloon payment?
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.
How do balloon payment car loans work?
A car loan with balloon payment is essentially split into two parts.
- Part A: The main portion of the loan that you repay gradually through your regular repayments.
- Part B: The balloon payment portion which you don’t need to repay until the end.
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 and without balloon payment example calculation
| Car loan with balloon payment | Car loan without balloon payment | |
|---|---|---|
Loan amount | $30,000 | $30,000 |
Loan term | 5 years | 5 years |
Interest rate | 7% | 7% |
Balloon payment | $7,500 (25% of loan amount) | $0 |
Monthly repayment | $489.28 | $594.04 |
Total interest cost | $6,857 | $5,642 |
Total to be repaid | $36,857 | $35,642 |
Difference in cost | +$1,215 |
What are my options when the balloon payment is due?
Here are the options you’ll typically have:
- Make the balloon payment and keep the car: Your loan is cleared with no more repayments to make.
- Trade in and upgrade your car: A popular option is to upgrade the car at the end of the loan term and make the balloon payment using the trade in value of the old car.
- Sell the car: You could choose to simply sell the car and use the proceeds to pay off the balloon amount.
- Refinance the loan: You may be able to take out a new loan based on the balloon payment amount (known as refinancing) and pay that off in regular repayments.
Reasons you might consider a balloon payment for your next car loan
To reduce regular payments
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.
To get the car you need
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.
When you want to trade-in regularly
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.
Available with different kinds of loans
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.
Potential disadvantages of a car loan with balloon payment
Higher overall cost
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
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.
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GET STARTEDGET STARTEDCommonly asked questions about car loans
Can you finance the balloon payment on a car?
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.
What is the maximum balloon payment on a car loan?
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.
Which loans have a balloon payment?
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.
What if I can't afford the balloon payment?
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.
Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
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*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.
