What you should know about car loan balloon payments
Not sure how car loan balloon payments work? Our guide shows you how.
Balloon payments can lower the monthly cost of your vehicle. But it won’t make your car loan any less expensive — and could even make it more difficult to afford. Find out when you can benefit and what to avoid.
What's in this guide?
- What is a car loan balloon payment?
- What are the benefits of a balloon payment scheme?
- Are there any drawbacks to making a balloon payment?
- How much will my car loan cost with a balloon payment?
- Three important questions to consider
- Ready to apply? Compare car loans
- Should I refinance a balloon payment?
- Bottom line
- Frequently asked questions
What is a car loan balloon payment?
A car loan balloon payment is when you make small payments on your car loan leading up to a big payment at the end of the loan term.
Some car loans come with balloon payments to lower your initial monthly costs without lengthening the loan term. Balloon payments are also common used with auto leases.
Balloon payments might seem like a way to make your car loan more affordable, but that’s not always the case. Unless you have a lot of money coming in by the time the payment is due, you might be faced with a bill for hundreds or maybe thousands of dollars that you cannot pay.
Can’t afford to make your balloon payment? You might be forced to refinance your loan, which will lengthen your repayment period and add to your costs.
What are the benefits of a balloon payment scheme?
Although you may owe a large amount of money once your loan is up, a balloon payment scheme has its benefits including:
- Reducing your monthly payments. This is the main advantage of a balloon payment schedule. You’re only making small installments on the principal amount of your loan, so your monthly payments are small and more affordable.
- Building up your savings. You’ll know from the start how much your balloon (large) payment at the end of the loan term will be. This means that you can start saving for it as soon as your loan begins. If invested over the course of your loan, this savings can earn interest that would otherwise be going straight into your lender’s pockets.
- Determine the payment amount. The amount of the balloon payment is generally flexible and can be set when you’re negotiating your loan contract. A standard balloon payment for a car loan is usually a few thousand dollars, but can be higher or lower.
Are there any drawbacks to making a balloon payment?
While there are some benefits to having a balloon payment at the end of your car loan, consider some negative features before committing to this scheme.
- It can lead to more debt. If you find yourself unable to save up for the final balloon payment, you could be stuck refinancing your loan and taking on even more debt.
- There’s a higher risk of repossession. When you take out a loan with a balloon payment, you run the risk of repossession if you can’t afford that final payment and don’t have good enough credit to refinance.
- It’s not actually cheaper. A balloon payment may make your monthly payments less expensive, but you’ll still end up paying the same amount as you would with a traditional payment schedule – much of the cost of the loan is simply loaded onto the back end.
Three important questions to consider
Before opting for lower repayments with a balloon payment at the end of your term, ask yourself:
- How much additional interest will I pay? While your repayments are lower, working out how much the lowered repayments are costing you in additional interest over the loan term is a crucial step. Are the long-term costs worth the short-term savings?
- How will I pay off the balloon payment? Many people put money away in a savings account or end up putting the amount on a no-interest credit card. Whatever you decide, have a plan in mind for how you will manage the final payment and make sure you stick with it.
- What will my car be worth when it’s due? A car’s value decreases over time. If the car’s value is worth more than your loan amount after three to five years, you might want to consider leasing the vehicle instead of buying — that way you can return it at the end of the term instead of paying more than its resale value.
What happens if I can't make a balloon payment?
If the loan was secured by your car, the lender could repossess your vehicle. If not, the lender might send your repayment to collections.
Either way, skipping out on your balloon payment will damage your credit and could make it difficult for you to get other types of financing.
Ready to apply? Compare car loans
Should I refinance a balloon payment?
Many dealerships make good money by refinancing balloon payments. If you’re coming to the end of your loan term and are unable to pay your balloon payment outright, auto refinancing could be a good option.
Take time to review your options before making a final decision. You don’t need to refinance with the same lender, and the terms of a refinanced loan should benefit your financial needs. Shop around for a competitive refinancing option that works for you.
Car loans with balloon payments can keep your monthly payments low, but they do leave you with a large payment to deal with at the end of your loan term. Keep your financing options open and consider other car loans before you decide.
Frequently asked questions