What is a Balloon Payment on a Car Loan?

Cars at a dealership

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.

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • 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

Good

  • 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

Fair

  • 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

Poor

  • 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

Bad

  • 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
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

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!

Who is the Legal Owner of a Car on Finance?

happy man who has become legal owner of car

If you’re thinking about purchasing a car through a finance option, you’re not alone. Around nine out of 10 of the new cars sold in the UK are bought by people who use a finance option. However, there are still some grey areas when it comes to ownership.

More specifically, who is the legal owner of a car on finance? Is it the driver or the dealership? Read on as we provide the answers.

Who is the legal owner of a car on finance?

In truth, the answer is neither you nor the dealership. It’s the lender that provides the money. The person who drives the vehicle and maintains it – AKA you – is known as the Registered Keeper in legal parlance. In other words, you will make the repayments and deal with the day-to-day running of the car, but your name won’t be on the V5.

Is there any difference between the finance options?

Yes, there are, but only when the loan finishes. Both PCP and HP are agreements that require repaying before the V5 is transferred to you. However, something to keep in mind is the final payment regarding PCP. Unless you pay off the balloon repayment, you will not own the vehicle. Where you don’t have the cash or savings, you may have the option of taking out balloon payment finance instead. With Hire Purchase, the last instalment of your loan will clear the balance and make you the legal owner.

Do I have other options?

One thing you can do if you want to be declared the legal owner is to use a bank loan. That way, you pay back the money to the bank, and the vehicle is all yours from the outset. Of course, taking out an unsecured bank loan may not be an option for your circumstances. In addition, you may not find the terms competitive.

Find the right finance deal

At My Car Credit, we help drivers up and down the UK find the finance they need to upgrade their car – and eventually own it outright if preferred. It doesn’t matter whether your budget is small or if you don’t think you qualify, we try to accommodate everyone, including those looking for car finance with poor credit.

To find out more, please contact us on 01246 458 810 to speak to an advisor.

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • 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

Good

  • 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

Fair

  • 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

Poor

  • 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

Bad

  • 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
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

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!

How to Refinance a PCP Balloon Payment

car bought on pcp finance with balloons in back

There’s no doubt that COVID-19 has affected all of our lives. For many of us, finances are tighter, and we must watch the pennies, now more than ever. As a motorist, you may be coming to the end of a PCP deal and cannot afford to buy a new car in the current climate. You also don’t want to lose out on a car you’ve been waiting years to finally purchase outright. Perhaps you have also grown attached to the vehicle and don’t want to hand the keys over at the end of the PCP agreement.

If this is the case, consider your PCP finance balloon payment. My Car Credit can help you with refinancing your balloon payment, leaving you free to keep driving your car with a new agreement in place.

 What is a PCP?

A PCP (Personal Contract Purchase) is a very common way of purchasing a new or nearly new car. Unlike a traditional personal loan or HP (Hire Purchase) agreement, you won’t be paying off the full value of the vehicle, and you won’t own the car at the end of the finance agreement – unless you choose to.

At the end of the term, you can either pay a final lump sum balloon payment to keep the car, hand the car back and walk away, or get a new car with a brand new agreement.

What is a PCP balloon payment?

A PCP finance balloon payment is the final lump sum needed to take ownership of a car at the end of an agreement. Most car finance paperwork refers to this as the optional final payment. When you first take out the loan, the vehicle costs are split across an initial deposit, a series of monthly payments and then this optional final payment if you choose to buy the car.

The balloon payment is fixed at the beginning of the contract, so you should be aware of the cost of buying the vehicle before you get to the end of the deal. The balloon payment is an estimate of the vehicle’s value at the end of the finance agreement, and it offers protection against an unexpected decline in your car’s value. It is also known as your car’s guaranteed minimum future value.

Should you refinance a balloon payment?

The current COVID-19 pandemic may have influenced your decision on whether to keep or buy your vehicle. Perhaps you’re a key worker and need a vehicle to rely on every day. Or maybe you’ve lost work and are looking for smart ways to save more money.

It is worth bearing in mind that due to the current difficulties in changing vehicles, some lenders are offering an extension to your current agreement.

However, if you want to keep the car, you would need to make the balloon payment. This is possible by paying the lender in cash or by refinancing the payment, which usually takes the form of a Hire Purchase agreement and will leave you as the car’s owner at the end.

Before making a final decision on whether to hand your car back or refinance the balloon payment, it’s important to consider your car’s current value with how much you’d have to pay – or refinance – to keep it. A good rule of thumb is if the car is worth less than the balloon payment, you may want to give it back and purchase a similar used model for less.

However, if the vehicle is worth more than the balloon payment listed on your agreement, you are better off paying – or financing – this amount to own the car for less than what a similar model would have cost you.

How do I refinance a PCP balloon payment?

If you want to keep the vehicle but cannot afford to pay the full optional final payment in cash, talk to My Car Credit about balloon refinancing. We have a number of lenders on our panel who offer balloon finance, so long as it is the right option for your circumstances.

Balloon payment finance is a Hire Purchase agreement. You can finance cars up to 10 years old or 100,000 miles at the start of the contract. Keep in mind that this will mean that you won’t own the car outright until you’ve made the final payment. However, if you refinance, you can settle your agreement at any point during the agreement.

There’s no doubt, this is an accessible and affordable way to spread the cost of car ownership. Best of all, at the end of the term, often between 24 and 60 months, the car becomes yours!

Another option for refinancing is opting for a bank loan. If you have a good credit score, you may be able to take advantage of low-interest rates. However, be aware that a personal loan does not have the same consumer protection rights as a hire purchase agreement. You may find you’re able to get a better deal with car finance, so it’s worth getting Hire Purchase quotes, too. My Car Credit offers rates from as low as 6.9% APR and will give you an instant online decision along with your expected rate of interest.

Get started today

Have you been thinking about purchasing your car at the end of your PCP agreement for a while? If you’ve been waiting years to finally own the car, don’t miss out! You don’t have to wait until the end of your PCP agreement before talking to your lender about refinancing. You may even be able to reduce your monthly payments by refinancing early.

• Start by applying for finance. Our dedicated car credit advisors will work with you according to your chosen financial plan and goals. We’re always on hand to help and are happy to guide you through the process.

• Calculate your budget. Get an idea of how much you can afford to spend.

• Let the team at My Car Credit handle the rest. We can help you land the right refinancing option that suits your needs and budget.

Find a financial plan to suit you

At My Car Credit, we understand that it’s a troubling time for everyone. That’s why our dedicated agents work to secure the right plan to suit your needs, vehicle and budget. To get expert advice and guidance, call us on 01246 458 810 or email us at enquiries@mycarcredit.co.uk. We look forward to hearing from you.

Representative APR 8.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • 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

Good

  • 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

Fair

  • 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

Poor

  • 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

Bad

  • 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
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 8.9%, annual interest rate (fixed) 8.86%, 47 monthly payments of £184.94 followed by 1 payment of £194.94 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,387.12, total amount payable is £8,887.12.

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!