A balloon payment can make a car loan look a lot more affordable each month. Then, at the end of the term, the lump sum arrives. Used well, a balloon is a handy cash flow tool. Used without a plan, it can leave you owing more than the car is worth. Here's how balloon payments work, who they suit and how to plan for the day yours falls due.
What is a balloon payment?
Moneysmart explains it simply: some car loans offer a balloon payment, also called a residual payment. You pay off part of the loan through your regular repayments, then pay a final lump sum at the end of the loan.
The balloon is agreed when you take out the loan. It's usually set as a percentage of the amount borrowed or the price of the car, and it stays in place for the whole term.
How a balloon changes your loan
Because part of what you owe is pushed to the end, your regular repayments are lower. The catch is that the balloon is still part of your debt for the whole term, and you're paying interest on it the entire time. As Moneysmart puts it, you have to repay the lump sum with interest, so the total cost of the loan is generally higher.
| Feature | No balloon | With a balloon |
|---|---|---|
| Regular repayments | Higher | Lower |
| Owed at the end | Nothing | A lump sum |
| Total interest paid | Lower | Generally higher |
| Equity in the car | Builds faster | Builds more slowly |
| Often suits | Keeping the car for the long haul | Managing cash flow or upgrading regularly |
Balloon vs residual: is there a difference?
The two words are often used interchangeably, but there's a useful distinction in practice.
- Balloon usually refers to a loan, such as a consumer car loan or a chattel mortgage for a business. The size of the balloon is set by the lender's policy, the vehicle and the loan term.
- Residual usually refers to a lease, such as a novated lease or a finance lease. For car leases, the ATO sets a minimum residual value for each lease term. On a five year lease, for example, the minimum residual is 28.13% of the car's cost.
If you're looking at a salary packaged car, our novated leasing page explains how the residual works on those.
Who a balloon can suit
A balloon isn't good or bad on its own. It depends on how you'll use the car and how you'll pay the lump sum. It can make sense for:
- business owners using a chattel mortgage who want lower regular outgoings and the flexibility to manage cash flow
- drivers who upgrade every few years and plan to sell or trade in the car before the balloon falls due
- anyone with a clear, realistic plan for the lump sum, such as savings built up over the term.
The risks to weigh up
The lump sum doesn't go away. Moneysmart's advice is to make sure you'll have enough money to pay the balloon when it's due. Lower repayments today can simply move the problem to the end of the loan.
You'll pay more overall. Because you're paying interest on the balloon for the full term, the total cost is generally higher than the same loan without one.
The car might be worth less than the balloon. Cars lose value over time, and kilometres, condition and the market all affect what yours will be worth. If it's worth less than the balloon when it falls due, selling the car won't clear the debt.
Refinancing isn't automatic. Many people plan to refinance the balloon. That still needs a fresh approval, and your income or circumstances could change between now and then.
Your options when the balloon falls due
| Option | How it works | Worth knowing |
|---|---|---|
| Pay it out | Pay the lump sum from your savings | You own the car outright |
| Refinance it | Take out a new loan for the balloon amount | More interest over the new term, and it needs approval |
| Sell or trade in | Use the car's value to clear the balloon | You'll need to cover any shortfall |
Start planning well before the due date. Check what the car is worth, look at your savings and get a refinance quote early if that's your plan, so you're not making the decision under pressure.
Questions to ask before you choose a balloon
- What's the total cost over the term, with and without the balloon?
- What's the car likely to be worth when the balloon falls due?
- How exactly will I pay the lump sum?
- Are there fees or conditions if I want to pay the loan out early?
- Would a smaller balloon, or none at all, still fit my budget?
Balloons on business vehicles and equipment
For ABN holders, a balloon on a chattel mortgage works the same way. It lowers the regular repayments in exchange for a lump sum at the end, and the same planning rules apply. Balloons are common on utes, trucks and business equipment, where matching repayments to the way the business earns can help cash flow. How it's treated for tax is a question for your accountant.
How Lend It helps
We compare 70+ lenders for car loans, and we'll show you the loan with and without a balloon side by side, so you can see the trade off before you decide. Approvals can come through in as little as 24 hours.
Getting a quote doesn't affect your credit score. We may run a soft check, and a full credit enquiry only happens when you apply. We're based on the Gold Coast, help clients Australia wide, have 250+ Google reviews and we're open 7 days, 8:30am to 6pm.
FAQs
Is a balloon payment the same as a residual?
They work the same way: a lump sum at the end of the term. "Residual" is usually used for leases, where ATO minimums apply to cars, and "balloon" for loans, where the lender sets the limits.
Can I pay a balloon off early?
Often, yes. Your loan contract sets out whether early payout fees or conditions apply, so check before you sign.
Can I refinance a balloon payment?
Usually, yes, subject to a new approval based on your circumstances and the car at the time.
How big can a balloon be?
It depends on the lender, the vehicle and the loan term. For car leases, the ATO sets minimum residual values instead.
Talk it through with us
Not sure whether a balloon suits you? Get a quote or call 1300 082 012, and we'll walk you through the numbers both ways.
General information only. This article is not financial, tax or legal advice and doesn't take your personal circumstances into account. Talk to your accountant or a licensed adviser before you make a decision. Lend It Finance Group is a credit representative (535206) of COG Compliance Services Pty Ltd, Australian Credit Licence 384428.