Balloon payment


Definition

A balloon payment is a lump sum owed to the lender at the end of a finance agreement.

Loans with a balloon payment option typically result in lower monthly repayments, as you’re deferring part of the cost to the end of the contract.

With car finance, there are two loan options that include a balloon payment. Personal Contract Purchase (PCP) and Lease purchase.

 

PCP balloon payment

With PCP, the balloon payment is sometimes referred to as an Optional Final Payment.

This is because it’s optional, depending on how you wish to end the agreement. For example, if you wish to own the car the balloon payment will need to be paid.

However, if you opt to Part Exchange the car for a new contract or simply return it to the lender, there’s no balloon payment.

 

How it works

Your balloon payment is calculated by the lender at the start of your agreement, based on the Guaranteed Future Value (GFV) of the vehicle.

This is the resale value the lender predicts your vehicle to be worth at the end of your contract.

Your balloon payment is fixed at the start of your agreement and will not change, regardless of whether used car values fluctuate.

 

Lease purchase balloon payment

With lease purchase, you have the option to defer part of your loan to the end of the agreement. This is your balloon payment.

Unlike PCP, this is not an optional payment, so you’ll need to pay the deferred amount to own the vehicle.

 

How it works

Let’s say the cost of your loan is £15,000, but you choose to defer £5,000 to the end of the agreement.

The remaining £10,000 is spread over 48 monthly payments.

After your final monthly payment, you pay a lump sum of £5,000 to the lender and the vehicle is all yours.

 

Can I finance a car without paying a balloon payment?

Not all car loans require a balloon payment. If you opt for Hire Purchase or Car Leasing your payments are evenly spread over the length of your contract, with no balloon payment option.

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