When researching car loans, you might come across the term “balloon payment.” But what exactly is it, and is it the right option for your financial situation?
Let’s break it down in simple terms so you can make an informed decision before you sign on the dotted line.
What is a Balloon Payment?
A balloon payment is a lump sum that’s due at the end of a loan term. Instead of paying off the full value of your car over the life of the loan, you make smaller regular repayments, then pay the remaining balance (the “balloon”) at the end.
For example, let’s say you take out a $30,000 car loan with a 30% balloon payment. Over the course of the loan, you’d repay $21,000 in smaller monthly amounts — then $9,000 as a single final payment.
Why Would You Choose a Balloon Payment?
The main reason borrowers choose balloon payments is to lower their monthly repayments. This can be helpful if you need to manage your cash flow or if you’re only planning to keep the car for a few years.
Bad credit car loans with balloon payments are also popular for those who plan to sell or trade in their vehicle at the end of the loan term. The trade-in value can help cover the final balloon amount.
Things to Consider
While balloon payments can reduce your monthly financial burden, they come with a few things to be aware of:
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You’ll owe a large amount at the end. If you don’t have that money saved or can’t trade in your car, you may need to refinance.
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You might pay more in interest. Because you’re paying less principal throughout the loan, the total interest paid could be higher.
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It may not suit all budgets. If you’re not confident about where your finances will be in a few years, it’s worth considering a more traditional car loan option.
Is a Balloon Payment Right for You?
Balloon payments can be a smart move for some — particularly if you have a clear plan for the end of your loan term. But for others, the pressure of a large lump sum can be stressful.
At Finance One, we help you weigh up your options based on your personal situation. Whether you’re after lower repayments, flexibility, or just want to explore what’s available, our team is here to guide you through it.
Explore our vehicle finance options or use our car loan calculator to see how different repayment plans stack up.
Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.
