Figuring out how to turn your dream car into a reality can be confusing, especially with so many finance options available. If you’re looking for a car and have a budget in mind for repayment costs, but you find your dream car is a little out of reach, a balloon payment might be the right choice.

In this article, we delve into the pros and cons of choosing a loan with a balloon payment.

On this page:

• What is a balloon payment?
• How does a balloon payment work?
• The advantages of a balloon payment
• The disadvantages of a balloon payment
• What happens to balloon payments at the end of the loan term?
• What are your options when your balloon payment is due?
• Is a balloon payment the right option for you?

What is a balloon payment?

A balloon payment is a one-time lump sum payment due at the end of a car loan term. It can be a helpful solution if you don’t have the financial resources to pay the full price for a car upfront.

The way a balloon payment works is simple: it decreases the ongoing repayments on your loan by adding a lump sum payment at the end of your loan which gets taken off the purchase price of the car. This lump sum can range from around 15% to 50%, depending on the size and length of the loan.

The balloon payment will be organised between the dealer or lender and the client. It means you can get the same loan amount while decreasing the amount you pay every repayment. However, as the repayments are lower, you will accrue more interest and end up paying more for the loan overall.

We’ll explain how this works below.

How does a balloon payment work?

Using the information above, what would be the difference in costs between having a balloon payment and not when taking out a $25,000 loan at 14.95% interest over 4 years using these figures? For this example, we’ll use a 30% balloon payment.

As you can see, the monthly payments for the first option are quite a bit less. But in the long run, you end up paying almost $2,000 more!

That extra cost also includes the $7,500 lump sum you have to repay at the conclusion of the loan. This isn’t optional, and can catch you by surprise if you haven’t prepared for it.

The advantages of a balloon payment

One of the main advantages of a balloon payment is that it reduces your repayments during the life of your loan. Since you’re borrowing less, you’re charged interest on a smaller amount. This can be good if you want to make your loan more affordable so that it fits into your everyday budget. 

It also gives you extra time to save up to make the final payment if you think you’ll be better off financially by the end of the loan term. Or, if you’re just looking for a car for a few years, having the balloon means you can have a lower repayment rate for a few years and then sell the car at the end to pay off the final amount.

The disadvantages of a balloon payment

Although it can be advantageous to pay less every week/month for your loan, the balloon payment means that you will pay more at the end of the loan.

At the end of the loan, thousands of dollars are still owed, which, if not properly budgeted for, can cause financial issues. You might be forced to sell the car to pay for it or take out another car loan.

Also, if the plan is to sell the car at the end of the loan to pay for it, there is the risk that your car will depreciate and sell for less than what is left on the loan, meaning you’ll still have to pay some of that lump sum if you don’t get as much for the car as you initially intended.

What happens to balloon payments at the end of the loan term?

The remaining balloon payment is due in full at the end of the loan term. Your payment options depend on whether you intend to keep the car.

With the average age of vehicles across Australia being 10.6 years, it’s not uncommon to want to keep the car you bought for a few more years. However, balloon payment time is also a good time to consider refinancing, selling the old car, and upgrading to something a bit newer.

What are your options when your balloon payment is due?

There are several options to choose from when it comes to paying off the balloon payment at the end of your loan:

Payoff in full and keep the car

If you can, save up and pay the balloon payment in full at the end of the loan term. If you think your financial situation will change by the time you need to pay the balloon payment, start saving for it as early as possible so that, in the end, the loan is paid, and the car is yours debt-free. This will require planning and budgeting prior to the end of the loan.

Trade in and upgrade your car

A popular option when dealer financing is to trade the car back to the dealership and upgrade to a new one. The trade-in of the old car will most likely be enough to cover the balloon payment and go towards another loan to upgrade. 

Alternatively, some dealerships will let you return the car at the end of the loan term and use that to pay off the balloon payment. So it’s almost like you’ve rented the car for a few years during the term! Beware, though, that there will be terms and conditions for this. The car will need to be returned in almost pristine condition to claim, and some have mileage caps as well.

Sell the car

If you reach the end of the loan and don’t want to keep your car, you can always sell it, use the money for the balloon payment, and keep whatever might be left. 

This can be a good option if you decide to downgrade your car or just find you don’t need one anymore.

Refinance balloon amount

If you can’t afford to give up your car but don’t have enough for the balloon payment, you can always refinance and get another loan for the amount the balloon payment is worth. 

However, it’s important to plan this in advance to ensure you have enough time to apply for and get approved for a new loan. This will help stretch out the repayments. 

Is a balloon payment the right option for you?

If you’re looking for a cheaper car loan option right now and think that you can afford it by the end of your loan term, a balloon payment can be the easiest option. It will give you a lower cost for the length of your loan. However, it will mean paying more overall.

Even though Jacaranda Finance doesn’t currently offer balloon payments with our loan options, we do have same-day pre-approval² available if you want a car now without the hassle of a balloon payment. Check out our Car Loan options to see how we can help!

Written by - Hope Turner

Marketing and Communications Coordinator

Hope is Jacaranda’s Marketing & Communications Coordinator. With several years of copywriting experience specialising in Social Media content, she is responsible for writing and updating website content and articles, updating social media, and everything in between!

You can get in touch with Hope via hopet@jacarandafinance.com.au.

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