Should you get a car loan with a balloon payment?

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 from balloon financing and when you may not.

What is balloon payment on a car loan?

A car loan with a balloon payment has smaller monthly payments throughout the loan term and one large “balloon” payment at the end of the loan. Balloon financing can lower your monthly costs without lengthening the loan term. But unless you have a lump sum of money ready when the payment is due, you might be faced with a bill for hundreds or maybe thousands of dollars you can’t pay. Balloon payments are also common on auto leases.

Are balloon payments more affordable?

Technically no, a balloon loan typically costs the same as a traditional loan. Paying less each month means you’ll have to make up the difference through the large balloon payment at the end of the loan. Also, some car loan providers will hike up the interest rate on loans with balloon payments. So you could end up paying more in interest than you would with a traditional car loan.

Is a balloon payment a good idea?

While opting for a balloon payment offers you some nice benefits, like lower monthly payments, balloon financing is ultimately much more risky than a traditional car loan. Consider these pros and cons of balloon loans below to help you decide if getting one is worth the risk.

Benefits of balloon financing

• 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.

Drawbacks of balloon financing

• 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. Balloon financing 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.

How much will my car loan cost monthly with a balloon payment?

You can find out how much your monthly payment will be with balloon financing using this car loan calculator. Simply subtract the amount of the balloon payment from your total loan amount, enter your new balance into our calculator below and click “Calculate” to find out how much you will owe each month.

Should I get a balloon payment? Ask yourself these 4 questions

Ask yourself these questions if you’re on the fence about singing up for a car loan with a balloon payment at the end:

1. How much additional interest will I pay?

While balloon financing will lower your monthly repayments, working out how much the lower payments are costing you in additional interest over the loan term is a crucial step. Are the long-term costs worth the short-term savings?

2. 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 goal in mind for how you will manage the final balloon payment.

3. What might 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 3 to 5 years, you might want to consider leasing the vehicle instead of buying — that way you can return it instead of paying more than its resale value.

4. Have I considered alternatives?

Balloon financing is a gamble. If you’re thinking of using a balloon payment loan to buy your dream car, you might want to consider going for a less-expensive alternative while you save up. It just might not be worth the risk unless it’s the only option you can afford.

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Can I trade in my car with a balloon payment?

Yes, you can trade in your vehicle before you’ve made the final balloon payment – but you’re still responsible for the amount owing on your loan. The best thing to do is pay the balloon payment to close out your old auto loan before you trade in your vehicle. If you don’t pay the balloon payment first, you may be able to put money from the vehicle’s trade-in value towards the outstanding balloon payment.

Alternatively, you could roll the balloon payment into your next car loan – although that could put a financial strain on you in the future. Let’s say, for example, that the balloon payment on your old car is $7,000 and you want to trade it in for a car that is worth $25,000. Instead of getting a 6-year car loan for only $25,000, you have to add the $7,000 for your balloon payment, making your new car loan cost $32,000. You would still have only 6 years to pay off the full $32,000, plus interest. Also, rolling old debt into a new car loan can easily lead you into an upside-down car loan, where you owe more on your car loan than the vehicle is actually worth.

What happens if I can’t pay my balloon payment?

If the loan was secured by your car, and you can’t pay your balloon payment at the end of the loan term, 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.

How do I get out of balloon financing?

The most common way to get out of balloon financing is to refinance with another lender. You’ll still have to pay off that amount, but it’ll break it up into more manageable repayments.

Refinancing essentially allows you to extend your loan term so you can pay off your car loan with low repayments the whole time.

Should I refinance my balloon payment?

Many dealerships make their 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 your time reviewing your options and 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.

Bottom line

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 about balloon financing

• Is balloon financing like a lease?

  No. When you take out a loan with a balloon payment schedule, you still own the car and will be able to keep it at the end of the loan term. With a leased vehicle, you make small payments on interest but don’t own the car. Unless your contract states that you have the option to buy the car at the end of your lease period, you’ll have to return the car and will have built up no equity.

• Do I need good credit to get balloon financing?

  Like most car loans, you’ll need decent credit to qualify, though the exact credit score varies by lender. The better your score, the less your interest will be and the less you’ll end up paying in the long run.

  Just as important as your credit score, though, is your actual ability to repay the loan. For this, you’ll need to provide the lender with proof that you have a stable, adequate income. Some lenders might have a minimum income in order for you to qualify for a balloon payment schedule.

• Will my car's depreciation affect my balloon payment?

  Most likely, yes. Any car has the potential to depreciate faster than the owner can pay off the loan, leaving the owner with an “upside down car loan” (which means that they owe more than the car is worth). You could end up owing much more than your car is worth, but would still be responsible for making payments on the loan.

  Your lender will expect you to pay them the amount you agreed upon at the beginning of your contract, regardless of whether the car is actually worth that amount.

• Can you pay off a balloon car loan early?

  Yes, in most cases you can pay off your balloon payment early. All you have to do is pay money more towards your loan at any point during the loan term. Keep in mind though, that some lenders charge an early-repayment fee. Read through your loan contract carefully, or call your lender directly, to find out if you’ll be charged any fees for paying your car loan balloon payment early.