What is a balloon payment, and should I have one?

A balloon payment (sometimes called a residual) is a lump sum you agree to pay at the end of your loan. Because part of the loan is left until the end, your regular repayments are lower during the term.

How it works

The balloon is usually set as a percentage of the amount financed. For example, a 30% balloon on $60,000 means $18,000 is due at the end of the loan, and your regular repayments are worked out on the rest. The higher the balloon, the lower your repayments, but the bigger the amount due at the end. How large a balloon you can have depends on the lender, the loan term and the age of the vehicle.

The pros

• Lower regular repayments, which can help with cash flow.
• Can make a better vehicle affordable within your budget.
• Useful if you plan to upgrade or trade in before the end of the term.

The cons

• You'll pay more interest overall, because the balloon amount stays owing for the whole term.
• You need a plan for the lump sum at the end.
• If the vehicle is worth less than the balloon when the loan ends, you'll need to cover the difference.

Your options when the balloon is due

• Pay it out in full and own the vehicle outright.
• Refinance the balloon amount into a new loan.
• Sell or trade in the vehicle and use the proceeds to pay it out.

This guide is general information only and doesn't take into account your objectives, financial situation or needs. It isn't financial, tax or legal advice. Talk to us about your situation, and to your accountant about tax.