Here we’ll be answering all your questions on this term like: “what’s the definition of a balloon payment? What is it for?”
We’ll also give you everything else you need to know. You can even use our auto loan balloon payment calculator powered by AILO for your loan search.
It’s a one-off large lump sum payment that you agree to pay your lender in advance at the end of a loan’s term. In exchange for this arrangement, you will only be required to pay interest on part of the principle (not the full amount). It’s a popular agreement in car loans particularly, but it's also used for equipment loans for businesses.
Agreeing to a ‘balloon payment’ in your car loan agreement can be a sound strategy to reduce your monthly repayments. It gives you the flexibility to have more options with your finances; like going for a more expensive car (for car loans) or putting more of your money in the short-term into investments.
There’s also some flexibility you can have around the balloon payment itself in auto loans.
Instead of waiting to pay off the balloon repayment at the end of the loan’s term, some people either choose to refinance the amount, or sell or trade in the car.
You can use our car balloon payment calculator to compare the best loan options for your car loan and give you more information about what you can expect to pay.
If you end the loan term and can’t afford the balloon payment, you still have the option of refinancing it. You will continue to make regular repayments similar to your original loan until it’s all paid off.
This can also make sense in cases where interest rates are low.
If you sell the car (instead of paying the balloon payment) the money you make may be sufficient enough to cover the cost of the balloon payment and give you the option to buy a cheaper car or put the money towards a car loan for a newer vehicle.
Instead of selling your financed car, you may be able to also trade in the car for another vehicle. When you’re trading in, the dealer will determine your vehicle’s market value based on the market as well as the condition of the car. They will use this amount to deduct the amount from the purchase price of your new vehicle.
If you decide to trade in your balloon payment-financed vehicle, it's important to be upfront and transparent with the dealer. They will typically pay off the outstanding balance for you, after making arrangements with your lender.
You won’t understand what this amount will be until you start comparing lenders and negotiating. But to give you a better understanding of what you can expect, your balloon payment will typically be 20-40% of the total loan.
It depends on the lender. However, in most cases, when you can, you will also be charged an early exit fee.
If you want to keep the car, then it should be something you consider. You can also compare this against refinancing your balloon payment.
Here are some things you should consider to help you compare:
| Criteria | Paying Off Balloon Payment | Refinancing Balloon Payment |
| Immediate Financial Impact | Requires a large lump sum payment | Distribute the balloon payment into smaller instalments |
| Long-term Financial Impact | No more monthly payments after the lump sum is paid | Extends the loan term, increasing overall interest paid |
| Total Cost | Potentially lower overall cost if the lump sum is available | May incur higher overall costs due to additional interest |
| Monthly Payments | Eliminates future monthly payments | Lower monthly payments compared to paying off in lump sum |
| Ownership | Full ownership of the car/asset after payment | Maintains ownership, but car/asset remains under loan agreement |
| Liquidity | Requires significant cash outflow | Preserves liquidity by spreading out payments |
| Interest Rates | No additional interest once paid off | Subject to current interest rates, which could be higher or lower |
| Financial Flexibility | Reduces debt burden, freeing up credit | Provides short-term financial relief but extends commitment |
| Suitability | Suitable for those with available funds seeking debt freedom | Suitable for those needing lower immediate financial burden |
#SalarySacrificing #CarFinancing
This is an attractive car financing option that employees can access through employers, through a salary sacrificing (or salary packaging) arrangement.
By using salary sacrificing, you and your employer agree that you will receive less income before tax. In return, your employer will pay for something that offers you benefits. It’s becoming a growingly popular way to increase what you can get out of your income pre-tax, get certain benefits, and pay less tax.
In a novated lease, your employer will pay for your car lease and running costs using a combination of pre-tax and post-tax salary deductions. By taking advantage of this arrangement, you will have a car you own (which is way more attractive than a company car you have to give back), and you can choose the car, make and model yourself.
This is not an option limited to new cars either. You can use a novated lease for a new, used, or even your existing car. Every novated lease also has a residual payment or ‘balloon payment’ that needs to be paid off at the end of the term.
The biggest is what you can expect—because it's in the name. You need to pay off one-large sum at the end of the term of your auto loan. So make sure you don’t forget about this big expense at the end of the loan term if you decide for this arrangement.
It’s important that you consider your finances and financial situation before you enter into this agreement, and understand whether it’s a suitable financial product for you. Here’s more information below to help you understand the benefits and drawbacks of a balloon payment car loan:
| Benefits of a Balloon Payment | Drawbacks of a Balloon Payment |
A balloon payment on your car loan has several advantages, primarily lowering your weekly, fortnightly, or monthly repayments. This can help you:
| However, there are also disadvantages to consider with a balloon payment:
|
Remember to consider these factors carefully. Balancing the immediate benefits with the potential long-term costs and financial risks is crucial when deciding if a balloon payment is the right choice for your car loan.
| Criteria | Car Loan with Balloon Payments | Traditional Car Loan | Lease | Hire Purchase | Novated Lease |
| Monthly Payments | Lower during loan term | Higher than balloon repayments | Lower, similar to balloon | Higher than balloon repayments | Lower due to salary packaging |
| End of Term Payment | Large lump sum payment | No large payment at the end | No ownership, optional buyout | No large payment at the end | Can have a large balloon payment |
| Ownership | After balloon payment is made | After loan is paid off | No ownership unless bought out | After final payment is made | No ownership unless balloon payment is made |
| Total Cost | Potentially higher overall cost | Lower overall cost if term is completed | Can be higher if bought out | Similar to traditional loan | Potentially lower due to tax benefits, but can be higher overall |
| Depreciation Risk | Buyer bears risk | Buyer bears risk | Leasing company bears risk | Buyer bears risk | Employee bears risk |
| Flexibility | Flexible options at end of term | Less flexible, fixed payments | High flexibility to switch cars | Less flexible, fixed payments | Flexible due to salary packaging, options at end of term |
| Financial Planning | Requires planning for large payment | Easier to budget fixed payments | Easier to budget fixed payments | Easier to budget fixed payments | Easier to budget, but plan for balloon |
| Credit Requirements | May require stronger credit | Standard credit requirements | Typically lower credit requirements | Standard credit requirements | Typically lower due to employer involvement |
| Upfront Costs | Can be lower | Typically requires down payment | Lower upfront costs | Typically requires down payment | Lower upfront costs due to salary packaging |
| Usage Restrictions | None | None | Mileage and wear-and-tear restrictions | None | Mileage and wear-and-tear restrictions |
| End of Term Options | Pay, refinance, or sell the car | Own the car outright | Return, buyout, or lease new car | Own the car outright | Pay balloon, refinance, return car, or lease new |
| Suitability | For those expecting future income increase | For stable, predictable income | For lower payments and flexibility | For those wanting ownership after payments | For employees seeking tax benefits and lower monthly payments |
| Investment Opportunity | Frees up short-term capital | Less capital available for investments | Frees up capital | Less capital available for investments | Frees up capital due to lower payments, but plan for balloon |
A balloon payment is just one part of many that you need to consider when looking at going for a car loan. You still need to consider others: such as the current interest rate, the size of your deposit, other loan terms, whether the loan is fixed or variable, and more.
Balloon payments are a very common option for car loans, and it can be helpful to lower your monthly payments. However, it is important to consider your circumstances and take the whole picture in mind when making a decision.
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