Balloon Payments
What a balloon (residual) payment is, why it lowers the instalment and what it costs you at the end of the term.
A balloon payment, also called a residual, is a portion of the vehicle price that is deferred to the end of the finance term rather than paid off in instalments. Because you are repaying less capital each month, the instalment drops. The catch is that the balloon amount, plus the interest that has accrued on it, is still owed when the term ends.
At that point you settle it in cash, refinance it, or sell or trade in the car and use the proceeds. Balloons make sense for buyers who plan to trade in regularly and understand the maths; they are risky for buyers stretching to afford the car. Compare a balloon and a non-balloon instalment on the same vehicle before deciding.
Balloon Payments — questions
The questions people ask about balloon payments, answered plainly.
What is a balloon payment on car finance?
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It is a lump sum, usually expressed as a portion of the purchase price, that you agree to pay at the end of the term instead of spreading it across the instalments. Your monthly payment is lower as a result, but the lump sum remains owing, with interest charged on it throughout the agreement.
Is a balloon payment a good idea?
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It can be, for disciplined buyers who change cars every few years, keep mileage moderate and plan for the settlement. It is a poor idea if it is the only way the car fits your budget, because the final amount arrives whether or not you are ready. Consider a cheaper car or a longer term first.
What happens at the end of a balloon agreement?
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You pay the balloon in cash, refinance it into a new agreement, or dispose of the car and use the proceeds to settle. If the car is worth less than the balloon, you must make up the difference. Plan for this well before the final instalment date.
Does a balloon payment reduce the total cost?
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No. It reduces the monthly instalment but increases the total interest, because you carry a larger balance for longer. If you compare the total amount payable with and without a balloon, the balloon option is always more expensive over the full term.
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