What Is a Balloon Payment: A Complete Guide

Oct 04, 2023 By Susan Kelly

You'll need a vehicle loan if you don't have much cash to buy a car outright. Car loans, however, may be rather pricey. A "balloon payment" loan might be a good way to reduce your monthly payments. Like most people, you've seen the term "balloon payment" while perusing auto loan offers in search of your next dream ride.

Just what does that expression mean? Simply put, a balloon payment is a final payment on a debt much bigger than the previous installments. This article will go through the fundamentals of a balloon payment in your auto loan.

What Is A Balloon Payment?

When you take out a loan for a vehicle, the lender will likely need you to make a one-time payment in the form of a large sum of money known as a "balloon payment." The fact that a balloon payment might be considerably larger or 'inflated' compared to the rest of your loan installments is where the unique term for this type of payment originates from.

On the other hand, one potential upside to this is that it could make it possible for you to lower your regular payments throughout the loan. Automobile loans with balloon payments are often available through dealer financing and non-bank lenders.

The payment amount is typically calculated as a percentage of the entire loan amount. In general, car loans with balloon payments are not recommended. You can negotiate the lump sum with your lender as a percentage of the overall loan amount. If this is the case, you should do it immediately.

How Does A Balloon Payment Work?

A borrower can make relatively modest loan payments at a predetermined interest rate for a certain amount of time before the conclusion of the loan term through the use of a payment structure known as a balloon payment. A balloon payment is a big payment made by the borrower at a specific time in the life of the loan that acts as the inverse of a down payment.

If the borrower finishes off the loan's principal, they will have repaid the lender for most of their initial debt. Many people who take out balloon mortgages wind up refinancing or selling their homes before the end of the loan term because the balloon payment is so much more than they can afford.

Advantages Of Balloon Payment

As demonstrated by the preceding illustration, the inclusion of a balloon payment can frequently lead your loan to balloon in size and make it more expensive in the long term. The amount of interest you pay will grow during the loan duration.

The trade-off for having lower monthly repayments is that you will pay off less of the amount you owe each month. It means that interest will be charged on a larger amount of money, which means that you will typically end up paying more by the time you factor in the balloon payment at the end of the loan.

It is possible that including a balloon payment on your loan can work out in your favor in some situations, but doing so takes careful preparation and may not be appropriate for all borrowers. You may be in considerable financial difficulty if you do not have the necessary funds to make the one-time payment when the loan period ends.

Disadvantages Of Balloon Loans

On the other hand, balloon loans are not without their share of dangers. Borrowers may be unable to persuade their current or new lender to cover the cost of their balloon payment. So, they can't afford to pay off the debt's principal all at once.

You'll probably need additional financing to cover the cost of the balloon payment on a loan with this structure. It can work in your favor if rates have gone down since you got the loan, but it might backfire if rates have gone up. Your only option may be to take out a new loan at the highest interest rate to cover the balloon payment.

Keep checking on the market if you want to get a balloon mortgage since the value of the home might rise or fall at any time. You can sell your home to come up with the money for the balloon payment, but if the value has dropped, you may not get back what you need. If that happens, you might be in danger of losing your loan.

How To Handle A Balloon Payment?

Before you even get the loan, it is important to make preparations for the one-time payment required when it comes time to make the payback. Remember that things do not always turn out how you anticipate they would. A balloon payment can be handled differently, depending on your preferences.

Getting another loan before the balloon payment is due is one option for paying off the debt when it comes due. To put it another way, you get a new loan. This loan will add anything from five to seven years to your current payment period.

You won't have any trouble paying back the loan when it's due if you don't run into any crashes with your cash flow. Because the loan might be for tens of thousands of pounds, this is not always possible. There are several circumstances where you can create the necessary funds before the balloon payment is due.

One possible strategy for dealing with the payments is to sell the asset you bought with the loan and use the money from that. It is still based on the assumption that the asset's current value is sufficient to cover the loan's outstanding balance.


Borrowers who choose balloon payments might lower their monthly payments but make a higher payment after their loan term. You don't need perfect credit or a six-figure salary to apply for this loan; we'll consider everyone who applies.

The hazards outweigh the benefits of a balloon mortgage for most borrowers. Borrowers who can make the balloon note payment may, in certain situations, choose to invest or use the money until the payment is due.

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