A balloon payment is a loan feature that lets you pay a percentage of their principal loan as a lump sum at the end of their loan term. This effectively lowers repayments, making your car loan easier to manage and freeing up cash flow, which you can direct towards savings or other expenses. 

However, a downside to this is the accrued interest on the lump sum amount. Balloon payments can range from 10% to 50%, depending on your agreement with the lender. You could end up paying more interest overall if you have a balloon payment. 

Balloon payments on car loans have pros and cons. It all depends on your situation and whether you can use this feature to your advantage. If you’re wondering if a balloon payment is a good idea, here are some instances where it may be helpful: 

You want to expand your price range 

When you’re figuring out a budget for your car purchase, you need to calculate how much your potential repayments are. In addition to the car's sale price, you should also consider the interest rate and loan term, as these factors will impact the overall cost of your loan. 

Having a balloon payment could allow you to expand your price range a bit because the regular repayments will be lower. For instance, if you find that your ideal car is a bit out of your initial budget after considering potential loan repayments, you can use a balloon payment to reduce them.

This doesn’t mean going out of your way to buy a car that’s entirely beyond your budget. You could go from buying last year’s model to a newer one that you might not be able to afford otherwise. 

You want more overall cash flow 

If you’re running a business and want to free up cash flow, adding a balloon payment on your business car loan could be a good idea. With lower monthly repayments, you have more freedom to move money around. 

Tax deductibility of interest or depreciation isn’t usually affected when you add a balloon payment to your car loan. However, because of the change in cash flow, your tax planning could change. Before taking on a balloon payment, it’s always best to discuss it with someone who can provide expert advice. 

You have income that doesn’t align with repayments 

If you receive periodic additional income that doesn’t fall in line with your loan repayments, such as quarterly or annual bonuses, a balloon payment could work in your favour. 

By taking the balloon payment option, you can enjoy reduced repayments and then make additional payments towards the balloon amount. Take note, this all depends on whether your car loan lender allows early repayments for the balloon payment. 

For those who are interested in this set-up, it’s best to speak with the lender first to learn about their policies. Or you can get in touch with a car loan broker to see if they can help you find a lender or dealership that offers those services. 

You want an easy upgrade 

A lot of people adjust their balloon payment amount to the forecasted depreciated value of the car at the end of their term. This means that when they trade their car in, the balloon payment matches the current value of the car. Borrowers can then take out another car loan with a similar balloon payment set up. 

This strategy also works for those who want to sell their car privately. The proceeds they get from the car sale will be put towards the balloon payment. This way, they have had use of the car for the full term at the reduced periodic payment and upgraded their vehicle when the balloon was due.  

This is a popular option for drivers who change vehicles every few years, rather than purchase a vehicle to keep long-term. 

Looking for a car loan with a balloon payment? 

Let CarLoans.com.au help you find the perfect car loan. Our car loan specialists are dedicated to finding you a car finance solution that fits your needs perfectly. We can connect you with our extensive network of trusted lenders and dealerships to give you the best deal possible on your loan.

Get in touch with us today by calling 1300 889 669. Or you can get a free quote online!