If you can't afford to pay for a car upfront, you'll need to take out a car loan. However, car repayments can be expensive. If you want to cut your regular repayments, one option is to get a loan with a "balloon."
Here we will explain the basic things you need to know about adding a balloon payment to your car loan:
What is a balloon payment?
A balloon payment is a one-off lump sum that you agree to pay your lender at the end of your car loan’s term. It is called a "balloon" because it is very inflated compared to your other payments.
Because this payment will typically account for a large proportion of your car loan’s balance, your remaining car loan repayments can be reduced as a result.
How does a balloon payment work?
Let’s say that you bought a vehicle that’s worth $40,000 with a car loan term of 5 years and an interest rate of 5.44%. You and your lender agree on a balloon payment of 25% or $10,000.
As a result, you will only have a monthly payment of $617.54. This is cheaper than having to pay interest on the full amount of $40,000 which is $762.94 per month. Using the balloon payment, you will be able cut your regular monthly repayment by $145. It is important to note, however, that you are unlikely to save money in the longer term as you still have to make the big balloon payment at the end with accumulated interest.
|With balloon payment||Without balloon payment|
|Money saved in monthly payment
|Total interest paid
|Total amount paid after 5 years
While you can save money every month with a balloon payment, you still need to pay the $10,000 in full at the end of the term.
You can use our car loan calculator to get an estimate of how much your repayments will be if you added a balloon payment to your car loan.
The pros and cons of a balloon payment
The primary advantage of including a balloon payment in your car loan is that it makes the monthly loan repayments lower. This gives you the benefit of:
- Making it easier to fit your loan within your monthly budget
- Freeing up your cash so you can put it towards your investments or other household expenses
- Giving you time to save up for the balloon payment
- Allowing you to pay off the balloon by selling or trading in the vehicle and using the money to repay the balloon, then taking out a fresh loan for another car.
There are also disadvantages if you decide to add a balloon payment. Here are some things to consider:
- The cost of the loan in the long-term is higher
- Refinancing can be difficult
- You will end up with a big bill (eg. the balloon amount) to pay at the end of your car loan term
The bottom line
Adding a balloon payment to your car loan will give you the benefit of lower ongoing repayments but it is crucial to make sure that you will be able to settle the balloon payment at the end of the loan term.
You can check out our car loan products and see which one will suit you the best.