How car loan balloon payments work

What is a balloon payment on a car loan?

A car loan balloon payment is one large payment that’s due at the end of your loan following smaller monthly payments. Some car loans come with balloon payments to lower your initial monthly costs without lengthening the loan term. Balloon payments are also common on auto leases.

What are the benefits of a balloon payment?

Although you may owe a large amount once your loan is up, balloon payments have their benefits that include:

• Reduce your monthly payments. This is the main advantage of a balloon payment schedule. You’re only paying off your interest so your monthly payments will stay small and more affordable.
• Build up your savings. You’ll know from the start how much your balloon payment will be. This means you can start saving for it as soon as your loan begins, earning interest on money that would otherwise be going into your lender’s pockets.
• Balloon payment is negotiable. The balloon payment is generally flexible and can be set when you’re negotiating your loan contract. A standard balloon payment is a few thousand dollars, but can be more or less depending on the loan.

Are there drawbacks to 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 a loan.

• 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 and paying more in interest.
• Risk 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 the credit to refinance.
• More expensive. A balloon payment may make your monthly payments lower, but you’ll end up paying off your balance at a slower rate. This translates into higher interest payments.

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

You can find out how much of a balloon payment by subtracting that payment from your total loan amount. Enter your new balance into our car loans calculator below to find out how much you will owe each month.

Should I get a balloon payment? Ask 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 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?

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 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 three to five 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 payments are 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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How do I get out of a balloon payment?

The most common way to get out of a balloon payment 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?

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 help keep your monthly payments low, but they do leave you with a large payment to deal with at the end of your loan. Keep your financing options open and consider other car loans before you decide.

Frequently asked questions

• Is this like a lease?

  No. When you take out a loan with a balloon payment schedule, you 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 you can buy the car at the end of the lease period, you’ll have to return the car and will have built up no equity.

• Do I need good credit to get a balloon loan?

  Like most car loans, you’ll need decent credit to qualify, though the exact number 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.

  More important than credit is your ability to repay the loan. For this, you’ll need to provide the lender with proof of your income, and some might have a minimum income in order for you to qualify.

• Will depreciation have an impact on my balloon payment?

  Most likely, yes. The car has the potential to depreciate and leave you upside down on your loan. You could end up owing much more on the car than what it’s worth, but still are responsible for making payments.

  Your lender will still expect the amount you signed at the beginning of your loan contract, whether or not the car is actually worth that amount.