What Is A Balloon Payment Car Loan? The Complete Guide

Balloon payment car loans are an interesting method for car financing. In this method, a client first takes a loan to purchase a vehicle and then they start paying off the loan amount with a very small monthly payment. At the end of the loan repayment tenure, they make a large lump-sum payment to complete the full repayment. Car finance with a balloon payment is very popular in the commercial vehicle financing industry.  However, the method has its inherent pros and cons that must be carefully analysed before committing to the decision.

Geo Truck Finance is a reputed name to get car finance loans in Melbourne. This is a place where you will get detailed assistance about how the car balloon payment works. We provide our clients with the best finance services as per their requirements. Our experts will help you learn every detail about the finance services that will help make your decision. Let us learn how the car balloon payment actually works.

In balloon payment car loans, a substantial chunk of the loan amount, between 10 to 50% of the total loan amount, is put aside for the final payment at the end of the loan term. This reduces the amount the debtor has to pay off through monthly instalments. As a result, the amount to be paid off each month also reduces significantly. These balloon loans, like any other loans, also have an interest component. The lender charges interest on the principal loan amount at a predetermined rate decided between the lender and the debtor.

Let us see an example of a balloon payment auto loan to understand the process clearly.

Suppose a person purchases a vehicle worth $40,000. They set their balloon amount at 30% (the average balloon payment rate for which the range is generally between 10 to 50%). This means that the total lump sum they will have to pay off at the end of their loan term will be $12,000. The rest of the amount will be paid off in monthly instalments. If the total loan tenure is three years, the person will have to pay the remaining $28,000 of their loan across the available 36 months.

Generally, the larger the balloon amount, the lower the monthly payments will be. However, if the balloon amount is too high, then very little of the loan will be paid off during the majority of the loan term and this may result in the debtor having to pay more in total as interest. Balloon payments are great for people who can take the loan term to successfully save up for the amount in the end.. However, people who struggle with long-term money management should not try this method.

Let us now check out what the term Residual Payment Loan means and how it differs from the balloon payment loan. Residual payment loans are technically the same as balloon payment car loans because a large section of the loan is paid off in a lump sum at the end of the loan tenure. The term residual payment, however, is used for a car loan in terms of finance leases and the total amount to be paid depends on a projected estimate of the car’s value at the time the lease ends. On the other hand, balloon payments are associated with commercial vehicle loans where the loan is in the form of a chattel mortgage.

Before making your decision, it is best to take into account the following pros and cons of making the balloon payment:

• Pros:
  • Low monthly instalments – lower monthly payments give vehicle owners more financial freedom. This is also useful for commercial vehicle owners who need to factor in the cost of fuel as part of their monthly expenses. By reducing the instalment amount, debtors get a chance to invest more in their business. The rewards of this investment can be used later to pay off the balloon amount.
  • Freedom to trade in or sell the vehicle – In case the debtor cannot pay off their balloon amount at the end of their loan term, they can easily sell off their vehicle and use that money to pay the balloon amount. Then, they can put in the application for another loan for a new vehicle. Some debtors who do not want to trade-in their vehicles can refinance their balloon payments.

• Cons:
  • Efficient money management strategy is essential – Making the balloon payment at the end of the loan term requires the debtor to start planning their finances much earlier. They need to organise their investments, make a schedule for saving and stick to it to be able to successfully pay their balloon amount. Anyone who struggles with such long-term planning and execution should avoid balloon payment car loans.
  • The final cost of the loan will be higher – If the total amount paid by debtors in general loans and balloon loans are compared, the amount is higher in the latter case. As very little of the principal is paid off during the loan tenure, the interest on most of the loan amount keeps accumulating in case of balloon payments. This is one reason experts warn against choosing too high balloon amounts.

Small business owners needing to meet immediate cash flow requirements and pay off the balloon amount in the future should go for this payment method. Individuals with exceptional planning skills can also try out this payment scheme. Balloon payments are most suited for vehicle owners who are ready to give up their vehicle at the end of their loan tenure. In such a situation, they can sell their vehicle, pay the balloon amount, and then begin the whole process again with another vehicle.

However, this kind of transitory system may not be very sustainable in the long run and the debtors should consider all the pros and cons of the process over time.

After the small monthly payments have been made and the debtor has arrived at the end of their loan term, there are three options available to them:

1. Pay off the lump sum– debtors who have carefully calculated their finances will be able to complete this payment without any trouble
2. Sell the vehicle and start another balloon loan – debtors can choose to sell their vehicle to pay off the balloon amount and then take up another loan for a new vehicle
3. Refinance the balloon amount – debtors can refinance the balloon amount, i.e., take a loan for the amount and pay it off in instalments. This, however, should be the last resort as the regular repayment burden on the debtor would be high which should try to be avoided in the first place.

Balloon payment car loans are quite popular in the commercial vehicle finance market. However, just like other loan services available on the market, the success of this loan service depends entirely on its compatibility with the debtor’s financial goals. If the debtor feels that smaller instalments will benefit them in the long run, then balloon loans are a viable option.

Geo Truck Finance is one of the top commercial vehicle loan financers in Melbourne. We provide balloon loans with the lowest interest rates and transparent calculations. Our aim is to ensure vehicle ownership is as smooth as possible for all our clients. So, we offer various payment options for our clients, including customisable loans and refinancing options.

The balloon payment scheme is a part of our customisable and flexible loan repayment schemes. Paired with the best interest rates in town and over 10 years of industry experience as some aspects that makes us the best choice for debtors.

Contact us today to get loans from an accredited Australian Finance Brokers Association Member. You can also call us on 0415 469 299 and 0451 509 299 or email us at info@geotruckfinance.com.au for more information.