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Car loan balloon payments – what are they?
If you’re in the market for a car loan, you may have seen the term ‘balloon payment’ floating about. Let’s take a look at what balloon payment car loans mean and how they could affect your repayments.
17 Jan 2025
If you’re in the market for a car loan, you may have seen the term ‘balloon payment’ floating about. Let’s take a look at what balloon payment car loans mean and how they could affect your repayments.
Key points:
- A balloon payment on a car loan is a lump sum of money you pay to your lender, generally at the end of your car loan.
- You could end up spending less on monthly repayments.
- A balloon payment can often bloat your car loan and make it cost more in the long run.
What are balloon payment car loans?
A balloon payment on a car loan is a lump sum of money you pay to your lender, generally at the end of your loan term.
Its unusual name comes from the fact that a balloon payment can be noticeably large or ‘inflated’ compared to the rest of your loan repayments. But on the positive side, this can allow you to reduce your monthly payments during the course of the loan.
Generally speaking, car loan balloon payments are most commonly offered through dealer finance and from non-bank lenders, and the payment is normally set at a percentage of the total loan amount. The size of the lump sum—i.e. the percentage of the total loan amount it comprises—may be something you can negotiate with your lender.
Are there any potential benefits to choosing a car loan with a balloon payment?
If you and your lender agree on a balloon payment at the end of your loan, you could end up spending less on monthly repayments.
We considered what your repayments might be on a secured car loan of $40,000, with or without a $12,000 balloon payment (30% of the loan value), based on a hypothetical secured car loan taken out over five years with the current average establishment fee and interest rate from Canstar’s database at the time of writing.
With a balloon payment:
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| Loan amount: | $40,000 |
| Interest rate: | 8.95% |
| Establishment fee: | $290 |
| Loan term: | 5 years |
| Balloon payment: | $12,000 |
| Monthly repayment: | $679 |
| Interest cost (life of loan): | $12,742 |
| Total loan cost
(excluding loan amount): |
$13,024 |
Source: www.canstar.com.au – 14/01/2025. Based on secured car loans on Canstar’s database available for a $40,000 loan amount and 5 year loan term, excluding green car loans. Where rate ranges apply, the midpoint of the range is used. Balloon payment calculations based on 30% of the loan amount and paid off at the end of the loan.
Without a balloon payment:
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| Loan amount: | $40,000 |
| Interest rate: | 8.95% |
| Establishment fee: | $290 |
| Loan term: | 5 years |
| Balloon payment: | N/A |
| Monthly repayment: | $837 |
| Interest cost (life of loan): | $10,205 |
| Total loan cost
(excluding loan amount): |
$10,487 |
Source: www.canstar.com.au – 14/01/2025. Based on secured car loans on Canstar’s database available for a $40,000 loan amount and 5 year loan term, excluding green car loans. Where rate ranges apply, the midpoint of the range is used. Balloon payment calculations based on 30% of the loan amount and paid off at the end of the loan.
Based on the example above, Canstar research shows that with a balloon payment of $12,000 on a hypothetical loan of $40,000, the monthly repayments would be $158 less than a comparable loan with no balloon payment.
But while a borrower’s monthly repayments would be lower with a balloon payment in this scenario, the overall cost of their loan would actually be higher. Our hypothetical example above shows that, with the balloon payment, a borrower would end up paying approximately $2,537 more over the lifetime of the loan with the balloon payment. They would also have to pay the $12,000 balloon payment plus associated interest at the end of the loan term.
Bear in mind, though, that this is just an example and is not based on real products. The exact amount you can choose as a balloon payment will likely depend on factors such as the car you buy and the dealer you choose.
What are some disadvantages of balloon payment car loans?
Including a balloon payment, as the example above suggests, can often bloat your car loan and make it cost more in the long run, because it will increase the amount of interest you pay over the course of the loan.
The tradeoff of lower monthly repayments is that you will be paying off less of the amount you owe each month, meaning that interest will be charged on a larger amount of money (the amount still owing) over the course of the loan, so you will often end up paying more once you factor in the balloon payment.
Including a balloon payment on your loan may work in your favour in some instances, but it requires careful planning and isn’t necessarily suited to everyone. If you don’t have the money handy to meet the lump sum payment when the loan term is up, you could find yourself in significant financial trouble.
What happens when the loan term is up?
When the term of a car loan ends, this is normally when you’ll have to pay off the balloon payment to your lender. If you can’t afford to pay the full amount in cash, you may need to sell your vehicle to be able to do so.
Selling the vehicle may be a suitable option if you’re looking to refinance and buy a newer model anyway. But it could be worth planning ahead before you take out your loan to try to ensure the resale value of your vehicle will be more than the cost of your balloon payment, or else you could find yourself with a shortfall to meet.
Who is most likely to benefit from balloon payments?
From a borrower’s perspective, balloon payments are often used by small businesses and sole traders who are looking to free up cash flow and aren’t put off by the potentially higher overall costs associated with balloon payments.
They may also suit people who want to upgrade their vehicle after a few years and don’t mind selling it at the end of the loan term in order to make the balloon payment. If you do plan to sell the vehicle at the end of the loan term, you may need to take into account how much it has depreciated in value since it was first bought.
What’s the difference between residual payments and a balloon payment?
You may come across both of these terms while comparing loans or other car financing options. Both refer to paying a lump sum at the end of a car loan, but they serve different purposes.
Residual payments are typically used on car leases, rather than loans. The size of this payment is calculated based on a forecasted final value of the car at the end of the loan.
Balloon payments, on the other hand, are based on a fixed percentage of the loan and, as a general rule, are not impacted by how much the car is worth at the end of the loan.
What other factors should I consider?
There’s plenty more to think about when it comes to taking out a car loan. For instance, you’ll also need to decide whether to get a fixed rate or variable rate loan, and whether you should obtain finance through a dealer, from a bank/financial institution or from the peer-to-peer lending market.
There can be advantages and disadvantages to each option, so it could be worth taking the time to do your research before committing one way or another. You can check out the Product Disclosure Statement (PDS), Target Market Determination (TMD) and other product documentation for more information on any loan product you are considering.
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Additional Reporting by Nick Whiting.
Cover image source: Tero Vesalainen/Shutterstock.com
This article was reviewed by our Finance Editor Jessica Pridmore before it was updated, as part of our fact-checking process.
- What are balloon payment car loans?
- Are there any potential benefits to choosing a car loan with a balloon payment?
- What are some disadvantages of balloon payment car loans?
- What happens when the loan term is up?
- Who is most likely to benefit from balloon payments?
- What’s the difference between residual payments and a balloon payment?
- What other factors should I consider?
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