What is a car loan balloon payment?
A car loan balloon payment is a large one-time repayment you make at the end of your loan term. Instead of paying off the full loan amount gradually through regular repayments, a chunk of it is deferred until the end of the loan term.
This portion of the loan becomes the balloon payment. It's generally between 20-40% of your loan amount depending on what you agree with the lender.
On the average car loan amount of $34,827, according to Money data from 2023, the balloon payment could range from $6,954 to $13,931.
But remember, this payment will likely be optional. Most lenders will give you a few options when the balloon payment falls due. I’ll explain these below.
The big advantage with this setup is your regular repayments will be lower. Because they will exclude the balloon payment amount.
On the downside, you’ll still be charged interest on the balloon payment amount the whole way through your loan term. So a car loan with a balloon payment can work out more expensive overall, compared to a loan without one.
Let’s look at why this is the case and some of the other pros and cons.
How do balloon payment car loans work?
Part A
The main portion of the loan that you repay gradually through your regular repayments.
Part B
The balloon payment portion which you don’t need to repay until the end.
Because of the split, the monthly repayment is less on a car loan with a balloon repayment.
Here’s a hypothetical example to illustrate the difference between a car loan with and without a balloon payment.
Car loan with and without balloon payment example calculation
Loan amount | |
Car loan with balloon payment | $30,000 |
Car loan without balloon payment | $30,000 |
Loan term | |
Car loan with balloon payment | 5 years |
Car loan without balloon payment | 5 years |
Interest rate | |
Car loan with balloon payment | 7% |
Car loan without balloon payment | 7% |
Balloon payment | |
Car loan with balloon payment | $7,500 (25% of loan amount) |
Car loan without balloon payment | $0 |
Monthly repayment | |
Car loan with balloon payment | $489.28 |
Car loan without balloon payment | $594.04 |
Total interest cost | |
Car loan with balloon payment | $6,857 |
Car loan without balloon payment | $5,642 |
Total to be repaid | |
Car loan with balloon payment | $36,857 |
Car loan without balloon payment | $35,642 |
Difference in cost | |
Car loan with balloon payment | +$1,215 |
Car loan without balloon payment |
| Car loan with balloon payment | Car loan without balloon payment | |
|---|---|---|
Loan amount | $30,000 | $30,000 |
Loan term | 5 years | 5 years |
Interest rate | 7% | 7% |
Balloon payment | $7,500 (25% of loan amount) | $0 |
Monthly repayment | $489.28 | $594.04 |
Total interest cost | $6,857 | $5,642 |
Total to be repaid | $36,857 | $35,642 |
Difference in cost | +$1,215 |
What are my options when the balloon payment is due?
Here are the options you’ll typically have:
Make the balloon payment and keep the car
Your loan is cleared with no more repayments to make.
Trade in and upgrade your car
A popular option is to upgrade the car at the end of the loan term and make the balloon payment using the trade in value of the old car.
Sell the car
You could choose to simply sell the car and use the proceeds to pay off the balloon amount.
Refinance the loan
You may be able to take out a new loan based on the balloon payment amount (known as refinancing) and pay that off in regular repayments.
Reasons you might consider a balloon payment for your next car loan
1
To reduce regular payments
Number one on the list is a biggie. Allocating a large amount of your loan into a single, final payment means all of your regular payments up until that point will be drastically reduced. Get an estimate of your regular loan repayments based on different loan amounts using our car loan calculator.
2
To get the car you need
Particularly in business car finance, but not uncommon with personal car loans, lower repayments because of a balloon payment can free up your cash flow.
This could allow you to use the money you’re not spending on the car loan for something more productive. Alternatively, it could bring the super-safe family vehicle you’ve been wanting — or just a slightly newer model of car — into reach.
3
When you want to trade-in regularly
A balloon payment can also be a useful option if you plan to regularly upgrade your vehicle. Instead of making the balloon payment, you use the trade in value of your vehicle to pay out the loan. If you’re planning to salary package a vehicle using a novated lease, you’ll find this a very common situation.
4
Available with different kinds of loans
You're not limited to a standard car loan if you're considering a balloon payment. You can typically get this option with the likes of used car loans, bad credit car loans, low doc car loans, private sale car loans and even for other vehicle types, such as with caravan finance.
Potential disadvantages of a car loan with balloon payment
Higher overall cost
While the regular repayments will be lower, factoring in the balloon payment at the end means a car loan financed this way could end up a more expensive option overall.
The balloon payment may come as a shock
Even though it’s what you’ve signed up for, that was five years ago. A lot could have happened in the meantime (house moves, kids etc. etc.). And now there’s a chance you’re not really prepared for the big financial outlay to cover the balloon payment.
Going the balloon payment route requires planning and budgeting for this big payment so you’re not ultimately forced to sell your car or take on another loan to repay the balloon amount.
If you're unsure about whether it's the right option for you, consider speaking to a qualified expert such as a financial advisor or an independent car loan broker.
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