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What is a Car Loan With a Balloon Payment?

Feb 13, 2022 | Finance Tips

When you’re searching for a car loan, affordability will likely be on your mind. So hearing about a balloon payment that promises to reduce your monthly loan repayments will probably sound very tempting, right? However, there’s more to balloon payments than meets the eye. 

We take you through nearly everything you need to know about balloon payments, as well as other flexible car loan repayment options that may be a better option (especially if you have bad credit).  

What is a Balloon Payment on a Loan?

A balloon payment is an option on some loans to help you lower monthly repayments. You can do this by arranging to make one (1) large final repayment (the balloon payment) when the car loan ends. This balloon payment is in addition to the regular (lower) loan repayments you make during the loan term.  

What are balloon car loans?

A balloon payment is a predetermined amount that a borrower pays at the end of a car loan term. The balloon amount accumulates (or inflates — like a balloon) over the life of the loan. Basically, with a balloon, you are only repaying a portion of the repayments, with the other portion being diverted to the balloon value for you to pay at the end of the loan term. Your monthly repayments are less with a balloon loan, but it all catches up at the end when you need to pay a lump sum. Balloon payments are usually between 30% and 50% of the loan amount, so they are able to reduce the regular repayments by a lot — but don’t forget, you’ll eventually need to repay that amount!

Example*

* Please note the scenarios below are to be used for the purpose of examples only and should not be relied upon in any way. These examples are not indicative of, or act as, approval of any kind. When applying for finance, all loan applications are subject to normal lending criteria, fees and charges, and terms and conditions that apply.

Let’s say you enter into a car loan for $20,000.00, and you agree to make monthly repayments of $289.20 over five (5) years, along with a final balloon payment of $6,000.00. When the $6,000.00 balloon payment is due, you can choose to:

  • pay it if you can afford it; 
  • trade your vehicle in to help pay it; or 
  • refinance that $6,000.00 debt into a new loan.

On the other hand, if you didn’t choose a balloon payment car loan:

  • Your regular repayments would be higher (around $377.42);but
  • You wouldn’t have to make the $6,000.00 balloon payment at the end of the loan term (or trade it in or refinance your loan). Instead, the loan would be fully repaid from your regular repayments. 
The pros and cons of car loans with balloon payments
Car loan balloon payments have both pros and cons. It’s important to understand each side of the story.
R

The Pros

  • They lower your regular repayments. However, if this is the only reason you want to include one in your loan, you have the option of financing over a longer term to do that instead. Longer loan terms lower your regular repayments (all other factors being constant). Typical car loan terms in Australia generally range from one (1) to seven (7) years.

  • They may help you qualify for a larger loan amount because of the lower regular repayments.
Q

The Cons

    • You might pay more interest over the loan term because the amount you owe won’t reduce as quickly. This is because there is the balloon payment left over at the end of the loan. So you’re effectively paying interest on the value of the balloon for the life of the loan. This is an important consideration as you could end up paying more than your car is worth.
  • You will still have a large amount owing at the end of your loan. If you do, it’s essential to have a plan in place for your balloon payment.

Refinancing balloon payments

Refinancing may be an option for your balloon payment itself if you come to the end of your car loan and you’re struggling to make that final payment. If you decide to refinance, it’s important to treat it as a new loan and search for finance that meets your needs. You can choose to refinance with the same lender or a different one.

Is a balloon payment the same as a residual payment on a car loan?

They are similar in that they both require a larger final lump sum payment. However, the amounts are calculated differently. You and your lender mutually agree on a balloon payment amount to include in your car finance. On the other hand, a residual payment amount is based on the forecast depreciated value of the vehicle at the end of the loan’s term.

How to calculate car loan balloon payments

Working out the balloon payment amount on a car loan requires a car loan calculator with a balloon payments component. Not all car loan calculators have this option because not all car loans come with a balloon payment option.

If you have a bad credit score, you may need to apply for a car loan with greater flexibility than a balloon car loan.

Flexible alternatives to a balloon payment loan

An alternative to taking out a car loan with a balloon payment is to take out a flexible vehicle loan. Flexible vehicle loans give you the ability to increase your regular loan repayments and make extra repayments at any time without additional fees and charges.

Making additional repayments or increasing your regular repayments during the term of your loan may save you a lot of interest, as the table below shows.

Here are the estimated figures*:

Loan Amount Loan Term Comparison Rate* Monthly Repayments Total Interest Payable
$20,000 5 years 5% $377.42 $2,645.48
$20,000 4 years 5% $460.59 $2,108.12
*The comparison rate includes the cost of loan interest plus any loan fees. Notice how increasing the monthly repayments by only $83.17 allows the borrower to pay off the loan a year earlier. It also saves them $537.36 in interest over the term of the loan! * Please note the table and scenario above is to be used for the purpose of examples only and should not be relied upon in any way. These examples are not indicative of, or act as, approval of any kind. When applying for finance, all loan applications are subject to normal lending criteria, fees and charges, and terms and conditions that apply. In addition, as mentioned earlier, taking out a car loan over a longer term (with all other factors remaining constant) also lowers the regular repayments, as the table below shows*. This can make the monthly repayments more affordable. However, it’s important to note that with a longer loan term, you’ll be making repayments for a longer period, so the interest expense could be much higher than a shorter term.
Loan Amount Loan Term Comparison Rate* Monthly repayments
$20,000 5 years 5% $377.42
$20,000 7 years 5% $282.68

Notice how increasing your loan term from five (5) to seven (7) years lowers your monthly repayment by $94.74.

* Please note the table and scenario above is to be used for the purpose of examples only and should not be relied upon in any way. These examples are not indicative of, or act as, approval of any kind. When applying for finance, all loan applications are subject to normal lending criteria, fees and charges, and terms and conditions that apply.

Finally, the ability to make one-off extra repayments on a flexible car loan allows you to make extra payments when you have the money available (for example, when you get your tax refund). On the other hand, a balloon repayment arrangement needs to be paid at the end of the loan, so you need to save and budget for it if you don’t want to sell your car or refinance.

Can you get a flexible car loan if you have bad credit?

Yes, but it’s essential to understand that not all lenders will approve your application. At Finance One, we assess all applications on their own merits, so we can be very flexible and even help Aussies with bad credit get the right car loan for their situation.

We take the time to understand your individual circumstances before recommending a flexible car finance solution to suit your needs. We arrange loans from $5,000 to $75,000** to purchase a new car or used vehicle.

Call us today on 1800 346 663 to find out how we may be able to help you!

 

Apply for a car loan

**Loans between $50,000 and $75,000 must be asset backed. Normal lending criteria apply. Fees and charges are payable. Terms and conditions apply.

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.

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WRITTEN BY

WRITTEN BY

Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

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