The Ultimate Guide to Balloon Payments

When looking to get a new business car, it’s good practice to explore all your options to ensure you’re making the best choice for your situation. Many first think about standard car loans and novated leasing - but another such payment option for a new car is the balloon payment.

As with any payment option, it’s also good to learn as much as you can about it, answering questions such as “What is a Balloon Payment?” and “How Do Balloon Payments Work?”. That’s what we hope to help with in this article, providing you with a guide to all things related to balloon payments.

What are balloon payments?

A balloon payment loan can be defined as a larger-than-usual lump sum payment that is paid back to the lender at the end of a car loan period. What this means is that entering a balloon payment car loan means you simply pay interest on part of the principle in exchange for the large end-of-loan lump sum.

The “balloon” part of the name comes from this inflated final payment. For this reason, balloon payments are most common with business car leases and loans - and they appear as an alternative to more standard forms of loans and monthly repayments.

How do balloon payments work?

Going into more detail, balloon payments work by having lower monthly repayments throughout the life of the loan, followed by a final lump sum payment at the end of the loan term.

This final payment can range depending on factors such as the vehicle, loan term, and more, but can be significantly sized - sometimes up to 25%, 50%, or more of the original vehicle price.

Let’s look at an example to explain this further. If you were looking to take out a loan to purchase a car valued at $50,000 with a 5.00% interest rate paid off over 5 years, your monthly repayments without a balloon payment would be $943.56 per month throughout the duration of the loan.

With a balloon payment at end of the loan, monthly payments will change. With a 25% (of original purchase price) balloon payment amount of $12,500, the monthly payments would drop to $759.75.

If the balloon repayment is even higher, monthly payment prices drop even further.

• A 33.33% balloon payment of $16,665 would make for monthly repayments of $698.51

• A 40% balloon payment of $20,000 would make for monthly repayments of $649.47

• A 50% balloon payment of $25,000 would make for monthly repayments of $575.95

With all the above providing information on how balloon payments are calculated, that doesn’t mean residual value can be set to any amount. The ATO has a minimum residual value that can be set for car loans of this type. These differ for different loan terms, which are listed below.

Why choose balloon payments?

With a deeper understanding of balloon payments, the benefits behind this form of car loan become clearer.

The structure of balloon payment car loans means that - for the majority of the car loan term - the monthly loan repayments are lower than other car loans. With the appropriate planning knowing that a large payment is coming at the end of the loan, this can make it easier to manage your finances across the entirety of the new loan.

With this reduced payment plan, you can put the extra money that would have gone to payments into other areas, including saving up for the balloon payment early or putting the money towards other household payments.

Possible drawbacks of balloon payments

As with any method for a new car loan, there are at least some potential drawbacks to utilising a balloon payment. The main drawback would be that - in the long-term - the overall cost of a new vehicle will be higher.

Due to the nature of balloon payments and how they work, you know that there is a bigger lump sum waiting for you at the end of the loan term’s standard monthly repayment plan. Of course, proper planning of your loan and continually saving money for the final payment should mitigate this - but it’s still very important to consider.

Another drawback to consider - that is also applicable to other loan methods - is that depreciation will lower the overall value of the vehicle over the duration of the loan.

Have your next car finance solution made easi

The team at Easi have over 20 years of experience with multiple business car finance solutions for a wide range of customers. We are able to deliver an extensive range of vehicle lease options under flexible contract terms ranging from utes to large SUVs, to hatchbacks with effective solutions like a novated lease.

To find out more about how Easi can assist with your business car leasing, contact us today and speak with one of our friendly staff.

Try our free novated lease calculator to see how much you could save!