A balloon payment can be an easy way to reduce your car loan repayments. But unlike a regular balloon, you can’t simply let that payment fly into the stratosphere and forget about it. So what are your options when your balloon payment is due?
What is a balloon payment?
A balloon payment, also known as the residual value, is a one-off lump sum you’re required to pay to your lender at the end of your car loan term. Balloon payments typically range from 30-50% of your original loan amount which is how they can so substantially reduce your repayments.
If you took out a $40,000 car loan for 5 years with a 4% interest rate and a balloon payment of 30% ($12,000), your monthly repayments would be $556. Without the balloon payment, your repayments would be $737, almost $200 more a month.
Why have a balloon payment?
There are a number of reasons borrowers may decide to have a car loan balloon payment. The first is the extra cash flow balloon payments provide, in comparison to not having one. As seen in the example above, a balloon payment can provide a significant reduction in monthly repayments. This can be helpful for people who may not have a great deal of disposable income and need that cash for other expenses.
Balloon payments can also suit people who like to drive a new car every few years. Selling the car at the end of the loan term to cover the payment can mean you’re driving the newest model without having to pay off the lump sum out of your savings.
Balloon payments often appeal to small businesses and sole traders who need to free up cash flow and don't want to lease a car.
What are your options when your balloon payment is due?
There are several options available to you when your balloon payment is due:
Pay the balloon payment: Arguably the most obvious option is paying off the balloon payment using your own cash, giving you complete ownership of the vehicle. This isn’t usually a very popular option, as balloon payments are typically a significant amount of money which most people don’t have lying around.
Sell the car: Selling the vehicle is usually the most popular option for when your balloon payment is due. Selling the car will typically cover the cost of the balloon payment, at which point you can then buy a new car and apply for another loan.
Trade in the car: Trading in the vehicle works much like selling it. However, you can pick out the new car you would like and your balloon payment will form part of the payment for this new vehicle.
Refinance: Some lenders will allow you to refinance the balloon payment so you can pay it in instalments, rather than a lump sum. Of course, this essentially negates much of the benefits of a balloon payment, and you will likely have to pay interest on this refinanced amount.
Want to start your car loan journey?
Using our car loan calculator you can see exactly how much your monthly repayments will be, with and without a balloon payment.
Our super-low, fixed-rate car loans make it easier to drive away in your dream car sooner. With our easy online application, it’s easy to get a loan approved within 24-hours. We’re currently offering a fixed-rate Personal Car Loan for 4.67% p.a. (5.22% p.a. comparison rate). You can also get a 0.7% discount on that rate if you buy a qualifying green car!
Get started on your car loan application today using the button below