Car Loan Balloon Payments

Updated On December 13th, 2022By Dynamoney

If you are looking to purchase a new or used car sooner rather than later, one avenue to consider is balloon payment car loans. A car loan balloon payment can reduce the cost of your repayments over the period of the loan. If you have been considering car finance and are unsure what a car loan balloon payment is, or how it can help, continue reading for more information.

What is a car loan balloon payment?

A car loan balloon payment is a one-off lump sum due at the end of your car loan after all repayments have been made. An agreed amount usually calculated as a percentage of the initial loan, a balloon payment helps to reduce your monthly repayments, in exchange for the lump sum payment. It is referred to as a balloon payment as it is a much larger amount compared to your other payments. Depending on the length of the loan period the balloon payment can be up to 50% of the car’s total purchase price.

How is a balloon payment calculated and how does it work?

If you are looking at a balloon payment you would typically discuss the amount you are seeking with your chosen broker or lender. They would then calculate the cost of your repayments based on the new loan amount and balloon payment. For example, if you intend to borrow $60,000 to finance a new car over five years and elect to have a 25% balloon payment you would be required to pay a lump sum of $15,000 at the end of the loan period.

What are the pros and cons of using balloon payment car loans?

Benefits of a car loan balloon payment

There are several benefits to using a balloon payment on your car loan. Primarily it will reduce the weekly, fortnightly or monthly repayments you will be required to make, which in turn can provide the following benefits.

• Repayments that are more affordable for your budget
• Allows you to free up cash for other expenses and investments
• Gives you extra time to save up enough for the final loan payment

Balloon payments are most commonly used by SME’s as a way to free up cash flow. Smaller monthly repayments can be a benefit to businesses looking to manage regular expenses. They are also often favoured by people who regularly update their vehicle every few years, selling or trading in the car to repay the balloon amount. If you do decide to take out a car loan balloon payment for your business, it is a good idea to consult your accountant to ensure it is the right move.

Negatives of using a car loan balloon payment

As with any loan, there are always downsides to consider. In the case of a car loan balloon payment, one consideration is the lump sum you will need to pay at the end of the loan. Before opting for a balloon payment with your car loan there are some things to consider.

• A balloon payment will make the overall cost of the loan higher in the long-term
• If you haven’t planned for the lump sum at the end, it could catch you unawares
• You will need to consider how having a lump sum works with depreciation if you decide to sell your car at the end

What happens at the end of my car finance loan term if I choose to use a balloon car payment?

If you choose to take out a balloon payment, there are a couple of options to consider when the lump sum is due. First and foremost, you can use your own savings to pay the balloon payment, however, people don’t commonly choose to do this as it is usually a sizeable amount.

Selling or trading in the vehicle in question is often the favoured approach as in most cases the sale price will cover the cost of the amount owing, at which point you can buy a new car and, if needed, apply for a new car loan.

Some lenders will also give you the option to refinance the car loan balloon payment so you can pay it in regular installments as opposed to a lump sum.

When considering a balloon payment, it is ideal to ensure where possible, that the balloon payment is less than or equal to the expected value of the vehicle in question at the time the lump sum payment is due. Keeping this in mind means that if you wish to upgrade your car at the end of the loan you are left with a zero balance for a new loan contract. Or even better money left over to put towards a new car.

What’s the difference between car loan balloon payments and residual payments?

It is not uncommon to come across both these terms when looking at car finance. Both options refer to lump sum payments, however, residual payments are usually used on car leases, where the lump sum payment amount is based on the anticipated value of the car at the end of the loan.

FAQS

Can you refinance your balloon payment?

Some lenders do offer refinancing, however, you shouldn’t rely on this. Even if you do apply for balloon payment refinancing be mindful that it will be treated as a new loan application.

How to extend a balloon payment on your car loan?

In most cases, you cannot extend the due date of your balloon payment unless you refinance the balloon payment amount to a new loan.

If you are looking to obtain a car loan with a balloon payment, contact Dynamoney today, our team is here to help.