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Balloon payments can lower the monthly cost of your vehicle and the amount of money you have to borrow, but they may be risky if you don’t save enough to meet the final payment.
Ideally, you should make sure that if at the end of the contract you can’t afford the balloon payment anymore, you can walk away without consequences.
Warning: late repayments can cause you serious money problems. See our debt help guides.
A balloon payment is one large payment that’s due at the end of your loan following smaller monthly payments. In general, you may have the option of making a balloon payment in two cases:
Although you may owe a large amount once your loan is up, balloon payments have their benefits which include:
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.
Ask yourself these questions if you’re on the fence about signing up for a car loan with a balloon payment at the end:
Try to work out the overall cost (and how much you’ll pay in interest) and compare it to the other two main types of car loans – that is, hire purchase and buying a car with a personal loan.
Keep in mind that a higher APR doesn’t necessarily mean a higher overall cost. For example, PCPs tend to have higher rates than personal loans, but by purchasing a car through a PCP you’ll borrow less money (only the difference between the initial value of the car and the GMFV). You’ll have to do the maths to figure out which is actually cheaper.
Many people put money away in a savings account or end up putting the amount on a no-interest current account. Whatever you decide, have a goal in mind for how you will manage the final payment. Sure, if you can’t afford it anymore and are in a PCP you can always walk away, but presumably you’ll still need a car, so…
If you enter a PCP, you can make a decision accordingly at the end of the agreement; if the car is worth way less than expected, you can just give it back and walk away.
All car finance options that entail a balloon payment also require an initial deposit (although it can be as low as 10% of the value of the car). If you don’t have a lump sum to begin with, you should consider buying your car through a personal loan instead.
Purchasing a vehicle with a car finance option that entails a balloon payment can be a good shout if you want to keep your monthly payments as low as possible. However, you still need to be prepared and have a clue of what you want to do at the end of the agreement.
If you want to keep the vehicle or if you’re bound to doing so by an LP, you need to start saving early to make sure you can afford the balloon payment at the end. If you don’t, you may have to apply for a loan at the end of the agreement to meet the balloon payment, which means you’ll have to pay more interest. At that point, it probably would have been better to just purchase the car with a personal loan from the start.
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