Car Balloon Payments: A Guide
Understanding How Balloon Car Loans Work
As a used car dealership that helps customers daily to finance their preloved vehicle, here at West Motors, we come across the term ‘balloon payment’ very frequently. However, it’s one of those terms you may not be familiar with when you come to buy your next car, but it’s one to get acquainted with if you’re interested in a Personal Contract Purchase (PCP) finance. Below is a guide to balloon payments including what they are, how they work, and when they apply. Read on to find out more about these.
What is a balloon payment?
A balloon payment is the amount of money due at the end of a Personal Contract Purchase, and is payable if you want to keep the car at the end of the term.
The amount due is calculated at the beginning of the agreement based on the guaranteed minimum future value, which is what the car is expected to be worth when the contract comes to an end. The figure is likely to be in the thousands, not the hundreds, but you’ll know what it is throughout the term, so it’s something you can budget for if you're looking to pay it outright.
How does a balloon payment work?
A balloon payment defers part of the loan amount until the end of the term, which lowers your monthly payments; it’s the price you pay for cheaper instalments to put it simply. At the end of your agreement, you’ll have three choices:
Make the car yours by paying the balloon payment
This will be the guaranteed minimum future value agreed upon at the beginning of the deal. Once this is paid, the car will be yours outright!
Give the car back and walk away
Handing the car back will settle your outstanding finance, so there’s nothing more to pay, providing you’re within the terms of your agreement (mileage limits and car condition usually).
Trade in the car
You can part exchange the car providing your existing finance agreement is settled, and start a new agreement on an upgrade.
Do you have to pay a balloon payment on every car finance agreement?
No. Balloon payments only exist on Personal Contract Purchase agreements, and you only need to pay them if you would like to keep the car.
If you want to avoid tackling a balloon payment at the end of your finance agreement, you would be better off looking into Hire Purchase; the payments are likely to be higher due to the absence of the balloon payment, but you’ll own the car outright once you’ve made the final payment.
When do you have to pay a balloon payment?
Once your PCP contract comes to an end, you’ll be presented with the three options we’ve mentioned above. Only if you choose to pay your balloon payment will you be required to pay it, and only when you’ve reached the agreed end of the contract.
What are the advantages of a balloon payment?
The main advantage of a balloon payment is the lower monthly payment, as well as the flexibility that a Personal Contract Purchase, in general, can provide, particularly if you’re someone that likes to upgrade their car regularly.
What are the disadvantages of a balloon payment?
Sometimes, you may find that the interest rate is higher on PCP deals, but it’s worth knowing all your options, so make sure you take a look at the small print. The main disadvantage is having to stump up the cash if you’ve fallen in love with the car!
Can you refinance a balloon payment?
If you’re really set on the car but really can’t afford to shell out, help is at hand in the form of more monthly payments. Double-check whether this is an option before you sign on the dotted line, in case you find yourself looking to spread the cost of your balloon payment.
Finance your next car at West Motors
Here at our West London used cars dealerships, we have over 100 vehicles in stock, with options for every lifestyle and budget. That’s not where the choice ends; flexible finance is available on every vehicle - you can even get a finance quote directly on our website!
Get started by browsing all the quality used cars we have in stock here.