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What is a Balloon Payment?

If you’re in the market for a car, home or business loan, you might come across the term balloon payment. A balloon payment is a one-off lump sum payment that you pay at the end of your loan term. 

You’ll still need to make regular repayments over the term of the car loan – however, because of the balloon payment, these repayments will be much smaller. Often, it works out that you’re repaying the interest on the car loan during these repayments, with the balloon payment at the end being the principal sum of the loan. 

Balloon payments are sometimes common in the business world, where companies who need to secure capital for urgent business expenses can take out a loan, benefit from the lower initial repayments, and ideally pay off the balloon payment at the end of the loan term when the business is operating better, and they have more funds to access.

Handy Finance does not offer balloon payments on any of our personal loan products. 

How are balloon payments calculated?

There is no set sum for a balloon payment, as what the payment is will depend on the terms of the loan – what sum you were approved for and the interest rate you secured on the loan. 

A balloon payment will always be the largest repayment you make over the loan. Some lenders will calculate it as a percentage of the borrowed amount, say 25% or 30%, and others will calculate it as a set dollar value. 

You will generally be able to negotiate this final sum with your lender. Many lenders also have balloon payment calculators that you can use to determine what your financial situation will be if you go ahead with a balloon payment as part of your loan. 

What are the disadvantages of balloon payments?

Balloon payments do have the advantage of lower upfront repayment costs. However, the overall cost of the loan is higher in the long term. You’re only repaying the interest over your loan term, and not making any headway on repaying that final sum. 

The balloon payment at the end of your loan can be significant, depending on the loan amount you’ve been approved for. There is a high risk of getting to the end of the loan term and being unable to make that balloon payment. If you took out your car loan with a balloon payment, you may need to sell the car to pay back the balloon payment – which has more risks as the car could have significantly depreciated in value during that time. Your other option might be to refinance or take out another loan to pay off this balloon payment. 

It can also be more difficult to qualify for a loan where a balloon payment is involved. You need to have a very high credit rating and to compensate for the larger risk, you will usually find a higher interest rate will be applied to the loan. 

Refinancing your balloon payment

We don’t offer balloon payments with our car loans or any other personal loan at Handy Finance, preferring to focus on delivering competitive interest rates and fair and flexible loan terms on our personal loan products. However, we can help if you are looking to refinance your current loan which does include a balloon payment. 

Refinancing is an option if you find your financial situation has changed and you can no longer afford to pay your balloon payment as one lump sum. When you refinance, you take out a new loan against the remaining sum. This new loan means an updated loan term and interest rate for your balloon payment. You can now also pay off the balloon payment in manageable weekly, fortnightly and monthly instalments rather than all at once. You can find out more about our personal loans online today. 

Balloon payments not for you? Explore other flexible financing options from Handy Finance

At Handy Finance, we specialise in fair and flexible personal loans between $2,001 to $75,000, with a $0 early repayment fee and the ability to select your repayment frequency. Select monthly, fortnightly or weekly repayments, depending on your preference. You’ll be offered a competitive, fixed-interest rate and loan terms between one and seven years (this increased to 10 years if you choose to take out a green loan with Handy Finance).

Our loan terms are always tailored directly to your financial situation so you can secure funds to finance a new car, home renovations or a dream holiday without the extra financial stress. We can also speak to you about various refinancing options for balloon payment loans you’ve taken out with other loan providers. Our Handy Finance credit team is here to help you find the best solution. You can easily apply online, and once your loan is approved, you’ll have access to your funds within 24 hours. Contact our team today to get started.