What is a balloon payment?

A balloon payment or “residual value” is an agreed-upon lump sum that you will pay to your lender at the end of the car loan term. Balloons are usually a significant lump of your loan amount (eg. 30-50%), but they generally result in lower monthly repayments over the course of the loan.

In the market for a new car? The table below features car loans with some of the lowest fixed and variable interest rates on the market.

Rates
Features
Fees
Other
Lender
VariableNew1 year
More details
  • Redraw facility available up to $5000/day
  • Available for purchasing new and demo vehicles
  • $5,000 to $150,000 loan amount
  • Required: Good credit history, stable employment history. Aus citizenship or PR.

New - Home Owner Special

  • Redraw facility available up to $5000/day
  • Available for purchasing new and demo vehicles
  • $5,000 to $150,000 loan amount
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
More details
FixedNew99 years
More details
APPLY ONLINE
  • Available for any new motorised vehicle
  • No ongoing or early exit fees
  • Flexible repayment options
APPLY ONLINE

New Car Loan

  • Available for any new motorised vehicle
  • No ongoing or early exit fees
  • Flexible repayment options
More details
FixedNew1 year
More details
Approval within 24 hoursEarly payout available
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
Approval within 24 hoursEarly payout available

New Car Loan - Special (Fixed)

  • Required: Good credit history, stable employment history. Aus citizenship or PR.
More details
FixedNew2 years
More details

New Vehicle Fast Loan Low Rate

    More details
    • Redraw facility available up to $5000/day
    • Available for purchasing new and demo vehicles
    • $5,000 to $150,000 loan amount
    • Required: Good credit history, stable employment history. Aus citizenship or PR.

    More details
    Important Information and Comparison Rate Warning

    All products with a link to a product provider’s website have a commercial marketing relationship between us and these providers. These products may appear prominently and first within the search tables regardless of their attributes and may include products marked as promoted, featured or sponsored. The link to a product provider’s website will allow you to get more information or apply for the product. By de-selecting “Show online partners only” additional non-commercialised products may be displayed and re-sorted at the top of the table. For more information on how we’ve selected these “Sponsored”, “Featured” and “Promoted” products, the products we compare, how we make money, and other important information about our service, please click here.

    The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless indicated otherwise. The comparison rates for car loans and secured personal loans for the relevant amounts and terms are for secured loans unless indicated otherwise. The comparison rates for unsecured personal loans are applicable for unsecured loans only. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

    Monthly repayment figures are estimates only, exclude fees and are based on the advertised rate for the term and for the loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. Rates correct as of December 11, 2023. View disclaimer.

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    How to calculate a balloon payment

    Example: If Daniel took out a $30,000 car loan for 5 years at 6% interest and had a (30%) balloon of $9,000, his monthly payments would be reduced from $579.98 (no balloon) down to $451. At the end of the loan term, he would then have to pay the $9,000 sum leftover in full.

    It’s important to remember that while car loan balloon payments are helpful because they reduce your monthly repayments, they do in effect charge you more in interest across the term of the loan. Looking at Daniel’s case a little closer, we see that with a 30% balloon, Daniel’s interest costs are $1,260 more.

    Cost of a $30,000 5 Year Car Loan at 6% Interest Rate (Excl. fees) 30% Balloon No Balloon
    Monthly Repayments $450.99 $579.98
    Total Repayment after 5 years (Repayments + Balloon) $36,059.40 $34,798.80
    Interest Costs $6,059.40 $4,798.80
    Cost Difference +$1,260.20

    Source: Savings.com.au Car Loan Calculator

    Why you might consider a car loan balloon payment

    There are a number of reasons why someone might consider having a balloon payment on their car loan. The first is that the repayments are less per month when compared to a car loan with no balloon. This provides a lot more cash flexibility, particularly for people who may have other expenses to pay (or less income coming in) for the period of the loan. It can also have the added benefits of qualifying for a larger car loan amount.

    A lot of people also consider car loan balloons because there is an option for them to trade in their car at the end of the term and use the proceeds to pay off the balloon. They can then apply for a new car loan to fund the purchasing of a replacement vehicle. This is quite common for business car loans.

    What happens when the balloon payment is due?

    The balloon payment must be made as a lump sum once the car loan has expired. There are typically a number of options available once the payment is due.

    • If the borrower wants a new vehicle, they can sell the car and use the money to make the payment and finalise the loan. The borrower is then entitled to buy a replacement car and if they wish, apply for a new car loan to pay for the replacement vehicle. If the car is being traded in as a part of the payment for the new vehicle then the Balloon Payment can be included in this process.
    • If the borrower wants to keep the vehicle, they can make the payment in cash, roll over or refinance the payment into another loan.

    FAQs

    Can you refinance the balloon payment on a car?

    At the end of a car loan, you could refinance the balloon payment to be paid off gradually, rather than in a lump sum. Bear in mind that this could be like taking out another loan, so you may accrue interest costs on this debt. In general, the longer the loan term you refinance this debt at, the more interest you could end up paying.

    How to extend a balloon payment?

    Generally, you can’t get an extension on the due date of a balloon payment unless you refinance to a longer loan term or into a new loan at the end of the loan term to be paid off gradually.

    Balloon payments in business car loans

    Because of the flexibility of smaller monthly repayments and the opportunity to replace your car every three to five years, balloons are commonly found in car loans for business and commercial purposes. Reducing the monthly repayments on a car loan can help a business to manage its short-term cash flow more effectively, while the higher interest rate charges can be claimed as a tax deduction.

    If you’re interested in taking out a car loan balloon payment for business purposes, it’s a good idea to consult a tax accountant or financial adviser to find out how it could benefit your business.

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    Savings.com.au’s two cents

    Having a balloon on your car loan will not save you money, because you will have to pay a higher amount of interest across the life of the loan. However, it will provide you with the great flexibility of lower monthly repayments.

    Remember though that while it will help you save on your outgoing expenses during the term of the loan, there’s a lump sum that needs to be paid at the end of the loan. Make sure to shop around for a low interest rate before making a purchase decision and calculate your possible monthly repayments in advance using a car loan repayment calculator.

    Article first published by Dominic Beattie, June 2018, updated by Aaron Bell January 2022. 

    Image by Aaron Burden via Unsplash