If you’re in the market for finance balloon payments are a term you might need to familiarise yourself with. Balloon payments can reduce your monthly repayments and make your next purchase more affordable. As with all good things, let’s begin with a definition of a balloon payment.

Balloon Payments

A long, long time from now, you’ll reach the end of your car loan’s term, and it’s here that you will make what is called a balloon payment. It’s a large, single payment at the end of your term. Why is it called a balloon payment? Well, like a balloon, it inflates at the END and is larger than those smaller payments you’ve been making all along. However, since it’s so inflated, that means that all along you’re going to be making smaller repayments each month.

Advantages of balloon payments

– A balloon payment reduces your monthly car loan payment, freeing up money for other fun things in life.
– Since your balloon payment swells over time, you can prepare for it and see it coming, unlike other unpredictable payments that may arise month to month.
– For businesses, they’re ideal, since businesses tend to be able to make larger inflated payments at the end of terms. If a business makes money with the vehicle it buys, obviously by the end of the term, they’ve amassed enough to pay off that inflated payment and live happily ever after
– Loan principal is reduced, while interest charges are a bit higher for business owners, so they can use this to their advantage come tax time. Tax accountants can help you take advantage of deductions and other goodies that surround balloon payments

A Bit More About Balloon Payments

You might have heard of something called a residual payment and mistakenly thought it is the same thing as a balloon payment. In fact, they’re a tad different. While they certainly involve a lump sum payment at the end of a loan term, there are some important distinctions between the two. Residual payments typically occur on leases, not loans, so you won’t hear residual mentioned if you’re financing a car or jet ski finance and paying a balloon payment. Also, fixed rates are the hallmark of the balloon payment, and the payment will have NOTHING to do with the value of the vehicle, as is the case with a residual payment.

So what can you do with these balloon payments and how do they help you? The great news is that there’s usually only one: That huge, all-consuming loan payment at the END of the loan. You can see it coming from a mile away and although no one looks forward to them, paying them means you’re done with your loan repayment. And that’s always relieving news. If you’ve got a balloon payment looming ahead, and you have the money to pay it, great! It’s one and done. If you don’t, you have some options, such as:

– Refinancing: Take out a new loan with either a new or your current lender, and you can repay the balloon payment over the course of the new loan. This means more interest, but if you need more time to pay this is a great option.

– Upgrading the car: If you’re at the end of your term, you might want to upgrade. This can rework all of your financing arrangement and push the balloon payment back into a new loan, to be paid off slowly over time. This is an exciting possibility because not only do you have more time to pay off the balloon payment, but you can begin to shop around for a better vehicle for yourself or your workers.

– Sell: There’s always the option to sell the vehicle. Once you’ve sold the vehicle, you can pay off the balloon payment and be done with the loan. Of course, you better make sure your business, or you have another vehicle to drive in the meantime! We don’t recommend this unless you are a business working with a large fleet of vehicles OR a private owner who has access to more than just one car.

That’s it! Those are the basics of a balloon payment. If one is looming ahead, a financial consultant can help you make the payment on time or arrange other options.