Balloon payments: How do they actually work?

If you have been looking into car finance, you have probably seen the term "balloon payment".

It is a popular option, but it can be confusing if you haven’t used one before. At Lendmatch, we want to make sure you know exactly what you are signing up for.

Here is a simple breakdown of what a balloon payment is and if it’s the right move for you.

What is a balloon payment?

Think of it like slicing a chunk off your car loan and saying "I will pay this part later."

It is a lump sum that you agree to pay at the very end of your loan term, rather than paying it off gradually every month. This amount is usually around 30% of the car's price, though it can vary.

Why would you do that?

The main reason is cash flow.

Because you are leaving a big portion of the loan for the end, your regular monthly repayments drop significantly. This can make a better car more affordable on a monthly basis, or just keep more cash in your bank account for other things.

But there is a catch. While your monthly bill is lower, you are still being charged interest on the full loan amount (including the balloon) for the life of the loan. This means you will usually pay a bit more in total interest compared to a standard car loan.

What happens when the loan ends?

This is the most common question we get. When the loan term finishes (usually after 3 to 5 years), that lump sum is due. You generally have four options:

1. Trade it in. You trade the car for a new one. If the car is worth more than the balloon amount owing, you can use the difference as a deposit on your next car.
2. Refinance it. If you want to keep the car but don't have the cash to pay the balloon, we can help you refinance that amount into a new loan.
3. Pay it out. You pay the lump sum with your own savings and own the car outright.
4. Sell the car. You sell the vehicle privately, use the money to pay off the balloon, and keep whatever is left over.

Is it right for you?

Balloon payments are very popular with business owners because of the cash flow benefits. They are also great for people who know they will want to upgrade their car every few years.

However, if you plan to drive the car for ten years until the wheels fall off, a standard loan might be cheaper in the long run.

Need help running the numbers?

Structuring a car loan isn't just about getting the lowest rate. It is about setting up payments that fit your budget.

If you aren't sure if a balloon payment suits you, give the team at Lendmatch a call. We can look at the numbers together and find the best fit for you.

‍