Individuals buy a car by choosing the best finance agreement. Car finance helps one spread the costs in equal instalments.
It is just about exploring the best quotes. While comparing these, you must have encountered the term “balloon payment”.
What is balloon payment on car finance? Does it benefit you in any way? What is the cost of the balloon payment? The guide below helps you analyse balloon payments. It may benefit you seeking car finance within a month or two. Individuals are seeking PCP or lease-purchase agreement.
What do balloon payments mean?
A balloon payment is a large lump sum that a borrower pays by the agreement’s end. The amount one pays is higher than usual payments on the agreement. Individuals share the flexibility to pay low regular payments and a high payment at the end. Usually, individuals with high credit scores, down payments, and high income may qualify for the balloon payments.
How to calculate balloon payments?
Calculating balloon payments differs slightly from the usual deposits you make. Lenders consider factors like- car make, car model, fuel type, estimated value and contract length.
For example, if you borrow a car on finance for £40000 for 5 years and £10000 as a balloon payment. Your monthly payments will be £576/month instead of £768/month. However, you must pay £10000 by the agreement ends.
A balloon payment is an optional payment. Check whether your lender allows it. If he does, analyse whether you qualify.
Can the car finance balloon payment change at the agreement end?
No. Balloon payment remains the same throughout the agreement. You must stick to the mileage and maintenance conditions as per the agreement. If you follow the agreement terms, you will not encounter any problems later.
Additionally, things are different if a car enters negative car finance. It implies the value of the car falls below the actual rate. In this, the balloon payment remains the same. You don’t pay anything extra.
Alternatively, if the car’s value increases after the agreement, you don’t pay extra to buy the car. You can buy the car at the initial car price.
Should you consider paying the balloon payment?
The borrowers eager to keep the car can consider a balloon payment. You become the legal car owner by paying the one-off payment. It is a popular part of the Hire purchase car finance agreement.
However, before paying anything, calculate your car’s value. If the car’s value is less than the balloon payment, return the car. Instead, you can switch it to the used car model for less.
Be aware of the fact that if you take PCP on the car and make an optional payment, it may cost more than on the Hire Purchase agreement. It is because you pay more interest than. If you struggle to pay the balloon payment, wait. Re-analyse your finances and save for balloon payment.
You can utilise the debts to save extra towards the payment. Merge your dues with a debt consolidation loan for a bad credit score. It is ideal if you recently missed some bill payments. Select costly debts first and consolidate. It helps you reduce the liabilities, improve credit and release a good amount. You can save it towards balloon payment.
Thus, a balloon payment works well with a Hire Purchase agreement.
Advantages and Disadvantages of making balloon payments
Knowing the pros and cons of balloon payments will help you decide the right take. Check the table below to analyse the same:
| Pros of making balloon payments | Cons of making balloon payments |
| Paying a high balloon payment by the agreement ends helps you lower the monthly payments. | Low repayments for a long loan period increase interest costs. The balloon payment may increase if you decide to refinance |
| Sell the vehicle at the end of the agreement by making a balloon payment. You can purchase a new car with a warranty and reduced maintenance costs. | Predicting the car’s depreciating value is hard amid the inconsistent economy. If the car depreciates more than expected, you pay a higher balloon payment. |
| You can own the car right away without making repayments with just a balloon payment | Car finance with a balloon payment comes with usage restrictions. You must maintain mileage and maintenance records. Additionally, qualifying for a balloon payment with a low credit score is challenging. |
Can you pay the balloon payment on the car finance agreement early?
Yes, you can pay the balloon payment on a car finance agreement early. However, you must know a few things before that:
1) Check early payment penalties
Before paying balloon payment analyse early repayment policies. The agreement discloses everything regarding the balloon payment. Paying extra without knowing the terms may attract a prepayment penalty. It makes the agreement even more costly.
2) Consider total loan costs
One must calculate the total loan costs before approving the agreement. Analyse- loan fees, APR, Deposit requirement, balloon payment, and additional fees. The best way to know approx. costs is through guaranteed car finance with no credit check.
Finance options like guaranteed car finance with no credit check help you know the costs quickly. It does not hamper your credit score. However, it helps you decide whether you can afford the payments and the balloon payment easily or not. It is one of the best solutions for individuals with inconsistent finances or low income.
- Understand the tax implications of prepayment
It is ideal for businesses, and self-employed seeking car finance solutions. Sometimes, paying extra may hamper your tax benefits or claims. Check whether overpayments before the loan term impact the same. If yes, it would be ideal to avoid it.
4) Negotiate with the lender for the best terms
It is generally tough to negotiate on balloon payments. It is because the lender decides the amount with the agreement only. It remains fixed throughout the term. However, you can try to do so by paying high repayments on the loan. Additionally, lenders may negotiate a balloon payment amount if you share a good bond.
Bottom line
Balloon payments are one of the best ways to own or switch a car. It lowers the monthly repayments on the car finance agreement. It grants you more financial flexibility to optime your bottom line. However, individuals with poor credit cannot qualify for balloon payments. Alternatively, it is the best solution for good credit and PCP car finance owners or those who want to purchase the vehicle outright.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.