Balloon Payments Explained
Applying for vehicle finance can be a nerve-racking experience. You’ll be met with an intimidating pile of documents that need signing and then there’s an overwhelming flow of new jargon that you’ll have to accustom yourself to (just so that you know that you aren’t literally signing your life away). However, if you research the finance application process beforehand, then you’ll feel more confident with the steps and your decisions. That’s why we have taken on the task to bring you guides that will walk you through the actions of purchasing a new or used vehicle.
In this particular guide, our focus is on “balloon payments”. We’ll discuss what they are, how they work, and if they’re right for you.
In This Guide:
- What Is a Balloon Payment?
- What Happens If You Cannot Make a Balloon Payment?
- The Advantages and Disadvantages of a Balloon Payment
- Is a Balloon Payment Right for Me?
- How Can I Find the Best Vehicle Finance?
What Is a Balloon Payment?
When you take out finance for a car, one of the payment options you’ll have is to add a balloon payment to your plan. This balloon payment option allows you, as the applicant, to pay off an inflated lump sum at the end of a loan term. This lump sum will be a percentage of the vehicle’s price plus any accrued interest. You can determine this percentage, or you can ask a financial manager to calculate a percentage in accordance with how much you would like to pay towards your car every month.
The aim of a balloon payment facility is to reduce the payment term without adding to the monthly premiums. Or, you can increase your payment term, and pay even lower premiums. Just keep in mind that when it's time to settle the balloon payment, it needs to be paid as one large whole sum.
What Happens If You Cannot Make a Balloon Payment?
When the end of your payment term arrives, most vehicle finance institutions will provide you with the following options:
- You can settle the total owing with one last lump sum payment. Once this payment has been made, then the car will no longer belong to the finance provider but will be solely yours.
- You can refinance the balloon payment. This means that you will enter a completely new finance agreement, just for the outstanding balloon amount. This typically needs to be put in place at least 60 days before the final payment is due.
- You can trade your car in for a new one. With this option, your car's trade-in value is used to cover the balloon payment. However, if the trade-in doesn't cover the balloon sum in full, then you will have to pay over the remaining amount.
- You can sell your car to cover the balloon payment and then keep the excess funds.
Many are often wary when it comes to agreeing to a balloon payment plan, but when you know what your options are, then you can find solace in planning ahead.
The Advantages and Disadvantages of a Balloon Payment
Balloon payments can often be a difficult concept for first-time borrowers to grasp. It is, therefore, important to have a thorough understanding of this loan repayment structure. To help you with this understanding, we have listed some of the advantages and disadvantages of this lump sum payment-type.
- You can reduce your monthly car finance repayments. This way, your premiums will stay small and affordable, which will help with your cash flow management.
- You can earn interest on any savings that you put away for when your lump-sum balloon payment is due.
- A balloon payment makes a finance agreement more flexible. It can help you to determine how you are going to pay your car off and when.
- A down payment or a deposit is usually not necessary with a balloon payment plan.
- It makes owning a more expensive car a possibility.
- When you come to the end of your payment term and you don’t have access to a lump sum of money to settle your balloon payment, then you could be stuck with refinancing your loan – which means more interest and more debt.
- If you don’t have the funds to settle your balloon payment and if you don’t qualify for credit for refinancing, then you risk repossession. This could also get you blacklisted.
- It’s more expensive. While your monthly payments may be reduced, you’ll have to pay higher interest rates and you’ll be paying more money overall.
Is a Balloon Payment Right for Me?
If you know that you can diligently put money aside every month so that you can settle your debt when the time comes, then a balloon payment may be an option for you.
Many financial providers will request evidence that you will be able to afford a future balloon payment. Evidence can include money that you have already saved, proof of a stable income, and an excellent credit record.
If you have enough money to spare per month, then it may be to your advantage to avoid the inclusion of a balloon payment plan when applying for car finance. This way you can save money overall.
How Can I Find the Best Vehicle Finance?
Have you found your dream car but don’t have cash on hand to purchase it? Then applying for vehicle finance may be your best option. But with so many car finance deals available, finding a car finance plan that’s right for you can be challenging – although, it doesn’t have to be!
One quick and easy way to shop for car finance is to use our free online quote comparison tool. This tool will help you to determine which providers are offering the best rates. It will also give you an idea of what their qualifying criteria are.
Having the best vehicle finance in place is one way to have more peace of mind.