The car loan industry has its fair share of jargon, and as a prospective buyer, it’s important to understand the lingo. “Balloon payment” is one of the most common terms you’ll encounter when shopping for loans, which is why we’ve dedicated an entire article to it.
Read on to find out more about the definition of a balloon payment on a car loan, what to expect and how to get the best deals on vehicle finance.
What is a balloon payment on a car loan?
The concept of a balloon payment on a car is relatively simple. It’s a final instalment, paid to the lender in a lump sum at the end of your loan. The balloon payment is usually larger than other previous payments and is designed to ensure the lender isn’t out of pocket.
Balloon payment car loans are offered on two types of finance agreements – Personal Contract Purchase (PCP) and Lease Purchase. We take a closer look at each below:
PCP balloon payment
PCP loans are one of the most popular ways for Brits to get behind the wheel of a new car. Most contracts span for three to five years and require monthly payments. At the end of the contract, you’re offered the option of making a final balloon payment to purchase the car outright. Also called an Optional Final Payment, this final instalment gives you full ownership of the car.
How a PCP balloon payment works
- At the beginning of your loan, the lender calculates the balloon payment based on the Guaranteed Future Value (GFV). This is the predicted resale value of the car at the end of the agreement. The balloon payment is designed to cover the remaining value of the GFV.
- The GFV doesn’t change over the life of your contract, regardless of whether the value of the car fluctuates.
- After making your final balloon payment, you take legal ownership of the car.
Think a PCP loan could be the right solution for you? Fast and easy to use, our car loan approval calculator is a great way to get the ball rolling and find out how far your budget can take you.
Lease Purchase (LP) balloon payment
LP agreements give you the option to pay a percentage of your loan at the end of the contract. This figure is called the balloon payment and unlike PCP loans, it’s not optional. Over the lifetime of the agreement, you’ll need to set aside cash to pay off the balloon payment. Once the balloon payment has been made, you take on full ownership of the vehicle.
How an LP balloon payment works
- At the start of the contract, you and the lender agree on a set amount to defer. For example, a car may cost £16,000 and you choose to defer £4000.
- The remaining £12,000 is paid over the next four years, in monthly payments.
- After making your final monthly instalment, you top up your balance with the balloon payment of £4000. This gives you legal ownership of the vehicle.
The benefits of a balloon payment on a car
Lower monthly repayments
Opting to make a balloon payment at the end of your contract is a great way to unlock lower monthly repayments. You’re essentially deferring a percentage of the total cost until the end of your finance agreement. This brings down your monthly repayments and can make it easier to incorporate a car loan into your budget.
Stretch your budget further
For many motorists, balloon payments are a great way to stretch the budget further. Instead of settling for a less-than-ideal vehicle, a balloon payment allows you to defer part of the cost and secure the keys to your dream car. With a responsible attitude towards finance, there’s plenty of time to save for your balloon payment.
Do all car loan contracts include a balloon payment?
No, not all contracts include a balloon payment. Options like Hire Purchase (HP) agreements incorporate the total cost into your monthly repayments. This means there’s no need to make a balloon payment at the end of your contract.
Can I refinance a balloon payment car?
We get it. Things come up and despite the best intentions, it’s not always possible to cover your balloon payment at the end of your contract. If you find yourself in this situation, it is possible to refinance a balloon payment car. Agreements usually take on a Hire Purchase model and spread the cost of your balloon payment across several months or years. At the end of the contract, you become the legal owner of the vehicle.
It’s worth noting that before opting to refinance a balloon payment, you should consider the current value of the vehicle compared to the cost you’ll have to absorb to keep it. If the vehicle is worth less than the balloon payment, it’s generally best to return it and purchase a similar second-hand car for less. Similarly, if the car is worth more than the balloon payment, it’s worth refinancing and committing to full ownership.
If you think refinancing your balloon payment could be a good option, the first step is to reach out to your lender. It’s also worth getting in touch with our team to discuss refinance options. Our panel includes plenty of lenders willing to offer balloon payment finance plans designed to help you stay behind the wheel.
Find out more about balloon payments
Want to know more about balloon payment car instalments and the different types of loans available to you? Send us an email or give us a call on 01246 458 810 to chat to an experienced team member. We’re here to help, so don’t hold back when it comes to questions and queries.
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