One of the many benefits of car finance is its flexibility. The range of car finance agreements means you’re guaranteed to find one that works for your unique needs and circumstances.

With that said, this range of options may make your decision feel overwhelming – and that’s not to mention the jargon involved in any choice!

This article will break down what a balloon payment is, how they work, and whether they’re right for you. By demystifying one of the more confusing terms associated with car finance, we’ll help you to decide whether car finance with a balloon payment is right for you.

What is a balloon payment?

In car finance terms, a balloon payment is a one-off lump sum that you pay to your lender at the end of certain finance agreements.

Both Personal Contract Purchase (PCP) and lease agreements have a final balloon payment that you can make at the agreement’s end. Making this payment means that you’ll own the car outright.

How do balloon payments work?

With both PCP and lease agreements, you’ll face a balloon payment at the agreement’s end (plus an option to purchase fee and possible admin fees).

Be aware that with PCP, a balloon payment is optional – you don’t have to pay it. You can choose to hand the car back to the lender or opt for a new finance agreement on another car. With a lease agreement, a balloon payment is not optional.

The amount you’ll pay for your balloon payment is calculated according to your lender’s estimation of your car’s depreciation. This is known by many names – the ‘Guaranteed Future Value’ (GFV), ‘Guaranteed Minimum Future Value’ (GMFV) and ‘Residual Value’ (RV). We’ll call it by the GMFV here.

The GMFV predicts the value of your car at the end of your finance agreement. Your lender will estimate this based on factors including the vehicle make and model, yearly mileage estimates, and the length of your agreement.

The GMFV (the balloon payment) is a fixed cost that’s written into your car finance contract. It can’t fluctuate based on your car’s actual value.

As such, even if your car is worth less at the end of your agreement than the GMFV estimation through no fault of your own, you don’t have to pay to make up the difference. Alternatively, if your car is worth more, you can find yourself in positive equity. This allows you to either make the final payment and sell the vehicle on for a profit – or put that equity towards another car finance agreement with the same lender.

What are the benefits of car finance with a balloon payment?

Don’t forget to check out our guide to the eight advantages and disadvantages of a balloon payment for a more comprehensive breakdown of their pros and cons.

Lower monthly payments

Compared to car finance agreements like Hire Purchase (HP), car finance with a final balloon payment has lower monthly payments.

You get to own your vehicle

If you love your vehicle and want to keep it, you can! Otherwise, you have two options available to you. You could part-exchange the vehicle for a newer, more modern vehicle, or simply hand the keys back, as long as the vehicle is in good condition, in line with the contract terms and within the agreed mileage.

What are the drawbacks of car finance with a balloon payment?

Usage restrictions

Car finance agreements like PCP do have vehicular usage restrictions. These may include a yearly mileage limit, and you’ll pay extra if you incur excessive damage.

These restrictions are established because of your lender’s prediction of your car’s GMFV. If you breach these restrictions, you can impact this estimation, and will be penalised.

Payment shock

A car finance agreement with a balloon payment means you’ll pay lower monthly instalments. However, this can mean that the balloon payment is expensive, and you may find yourself experiencing payment shock.

If you do find yourself in this position, you can benefit from balloon payment finance.

Not ideal for those with lower credit ratings

At My Car Credit, we understand that not all drivers have exceptional credit scores, and thanks to our wide range of lenders, we can accommodate all kinds of credit profiles.

If your credit score is less than ideal, you’re less likely to qualify for car finance with a balloon payment. Therefore an agreement without a balloon may be more suitable.

What happens if you can’t afford your balloon payment?

There can be any number of reasons why you may find yourself unable to pay your finance agreement’s final balloon payment.

My Car Credit understands that not all drivers may have the cash upfront to be able to make your balloon payment. Balloon payment finance provides one solution, working just like a car finance agreement. By breaking down the balloon payment’s lump sum into manageable monthly repayments, you have better budgetary control.

Use our online calculator to receive an instant no-obligation decision on balloon payment finance. Our initial credit check won’t impact your score, and we’ll leverage our large panel of lenders to find a deal that’s best for you. Please note that should you progress, some lenders may perform a hard search on your credit file.

Is a balloon payment right for me?

Car finance agreements with a balloon payment have various advantages. From lower monthly repayments to a guarantee of your vehicle’s future value, having an agreement with a balloon payment can be beneficial. Plus, with PCP finance, you don’t have to make the final lump sum – you can enter another finance agreement on a different car with the same lender. This is great for people who like to regularly update their wheels.

With that said, if you’ll struggle with usage limits or are prone to damaging your car, you may need to consider your options. Plus, you’ll have to evaluate your financial situation. Plan ahead to ensure that you can make the final balloon payment or consider balloon payment finance to avoid facing payment shock.

Wondering if you are eligible for My Car Credit car finance?

Do the maths on your next car with our handy online calculator and discover how My Car Credit can help you find the right car finance.

Rates from 9.9% APR. Representative APR 12.4%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating


  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed


  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs


  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit


  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past


  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan

X monthly repayments of

Typical rate

Loan amount

Total payable




*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 12.4%, annual interest rate (fixed) 12.36%, 47 monthly payments of £196.44 followed by 1 payment of £206.44 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,939.12, total amount payable is £9,439.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!