- A balloon payment is a large lump sum you agree to pay at the very end of your loan term, which “inflates” your final payment but significantly reduces your regular monthly repayments in the meantime
- It is a good idea to remember that while your monthly budget might feel lighter, you will typically pay more in total interest over the life of the loan because the balloon amount stays in the “debt pool” for longer
- When the balloon payment falls due, you generally have three options: pay it off in full with savings, sell or trade in the car to cover the cost, or refinance the remaining balance into a new loan
When someone takes out a car loan, they may be given the option of repaying the loan through two different structures – one with a balloon payment and one without.
What is a car loan balloon payment?
For borrowers whose car loan has a balloon structure, they agree on an amount they pay out in a lump payment at the end of their loan term. This means they make their regular monthly repayments based on the total loan amount, minus the amount they pay at the end. This can lower the repayments.
For borrowers who take out a car loan without a balloon structure, they repay the loan through a series of regular monthly payments. Once they’ve paid the final monthly instalment, the loan is cleared.
Regular car loan vs balloon car loan
Both options have pros and cons:
- Without a balloon structure, the borrower makes higher monthly repayments but pays less over the life of the loan.
- With a balloon structure, the borrower makes lower monthly repayments but pays more over the life of the loan (once the balloon payment is added at the end).
Which option is best?
There’s no one ‘best’ option, because it depends on the borrower’s unique circumstances.
For someone who believes they’d be able to make higher monthly repayments from the beginning to end of their loan, a regular structure might be more suitable, because they’d pay less over the life of the loan.
For someone who’d prefer to make lower monthly repayments – perhaps because they’re short on funds or would prefer to deploy the extra money elsewhere – a balloon structure might be more suitable, assuming they’d be able to cover the balloon payment at the end of the loan.
Thinking about buying a car? Your Loan Market broker can compare the market for you and help you get pre-approval for your loan.
