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 is a balloon payment on a car loan?
A car loan balloon payment is a 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.
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 thousands of dollars.
Can’t afford it? You might be forced to refinance your loan, which lengthens your term and hikes up the cost.
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.
- Determine the payment amount. 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.
What to watch out for
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.
- 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.
- Not actually cheaper. A balloon payment may make your monthly payments cheaper, but you’ll still end up paying the same amount as you would with a traditional payment schedule.
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 goal in mind for how you will manage the final payment.
- 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 instead of paying more than its resale value.
What happens if I can't make a balloon payment?
If you had a loan secured by your car, your lender could repossess the vehicle. If not, your 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 — and even sometimes affect future employment opportunities.
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Should I refinance a 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 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.
