Information on car loan balloon payments for borrowers

Rapid Finance on 28 September 2016

What are car loan balloon payments?

A balloon payment is a lump sum placed at the conclusion of a car loan. They lower monthly repayments but raise the amount a borrower is required to pay when finalising their loan term.

With a balloon payments, you essentially cut off a portion of the loan principal (amount borrowed) and place it at the end of your loan term. You do not pay this portion of the principal off month by month like the rest of your loan amount. You instead pay it out in full at the conclusion of your loan.

The benefit is that you receive lower monthly repayments.

The drawback is that you will be required to pay a lump sum at the conclusion of your car loan.

 

Example: How balloon payments lower monthly repayments

Here is how car loan balloon payments can work in practice. In this example we compare a car loan which uses a balloon payment and one which does not. Both examples feature the same 2016 Holden Astra.

 Car loan with balloon paymentCar loan without balloon payment

Car

2016 Holden Astra

2016 Holden Astra

Price

$26,990

$26,990

Deposit (10%)

-$2,690

-$2,690

Amount borrowed

$24,291

$24,291

Car loan interest rate

6.55%

6.55%

Car loan term

3 years

3 years

Balloon payment (25%)

$6,147.75

N/A

Monthly repayments

$590.32

$745.32

Difference

-$155 per month

 

Amount to be paid at end

$6,147.75

$0

Difference

+$6,147.75 one off payment

 

As you can see in this example, the monthly repayments on the car loan with a balloon payment are lower (-$155). However, the amount owed at the end of the loan is higher (+$6,147.75).

Note: This example is used for demonstrative purposes only. Interest rates and monthly repayments may not reflect the highest or lowest available to you.

Why do borrowers use balloon payments?

As stated above, a car loan balloon payment lowers your monthly payments, and this can mean a number of benefits for the borrower. A lower monthly repayment can allow borrowers to:

1. Finance a higher priced vehicle

As your monthly repayments are lower, you may be able to stretch your budget further. That means you could potentially finance a higher priced or better value vehicle.

2. Make extra payments

If you receive additional income, for example from a work bonus, some lenders will allow you to put that money towards your car loan balloon payment. In this way, you can often easily make extra payments on your car loan without having to alter your monthly payments.

3. Easy to upgrade

Many drivers use a balloon payment to facilitate the vehicle upgrade process. They take advantage of the lower monthly repayments and then at the end of the loan term they sell the vehicle to cover the balloon payment. Then with their previous car loan paid off, they obtain a new car loan to purchase a new car.

What happens when the balloon payment is due?

After all monthly payments have been made and the loan term is up, you will be required to pay your balloon payment in full. If your payment is 25% of the principal then you will need to pay the full 25%.

What happens if you can't afford to pay your car loan balloon payment?

If for whatever reason, you are unable to pay your balloon payment, you have a couple of options.

1. Refinance your car loan balloon payment

It's possible to refinance a balloon payment into a new loan which features a more manageable monthly repayment schedule. This way you don't have to pay your balloon payment all at once. You pay it off in increments over a term like any other loan.

2. Use your car to cover the car loan balloon payment

The other solution is to sell your vehicle and to use the funds obtained from the sale to cover your balloon payment. If you're thinking of taking advantage of this option, make sure you consider resale value when choosing which vehicle to finance.

"With a balloon payment you get lower monthly repayments and some extra options on your loan."

Want to know more? We're here to help.

At Rapid Finance, we're experts in car loans. Whether you're after a secured, unsecured, personal or commercial car loan we could help you to find the right finance for your situation.

If you have any further queries about balloon payments or car finance, check out our website or give one of our friendly car loan specialists a call. We're here to help.

For more information visit our car loans page or call 1300 467 274