What is a balloon payment?
A balloon payment is a lump sum left owing at the end of a finance term. It lowers your regular repayments during the term, because part of the amount borrowed is deferred to the end rather than paid off along the way. It has to be paid, refinanced or covered by selling the asset when the term finishes.
The detail
Balloons are common on vehicle and equipment finance and they are a genuinely useful tool when used deliberately. Lower repayments through the term can be the difference between an asset earning comfortably and straining cash flow.
The trade-off is that you pay more interest overall, because more of the balance stays outstanding for longer, and you have a decision to make at the end. If the asset is worth more than the balloon at that point, selling or trading covers it. If it is worth less, the shortfall is yours.
That is the part worth thinking about at the start rather than in the final month. A balloon set sensibly against what the asset will realistically be worth is a good structure. One set as high as the lender will allow, purely to get the repayment down, is how people end up owing more than the vehicle is worth.
Related questions
How big can a balloon be?
It varies by lender and by asset, and is usually expressed as a percentage of the amount financed. Newer assets with predictable resale values support larger balloons than older ones.
What happens at the end of the term?
You pay it, refinance it over a further term, or sell or trade the asset and settle it from the proceeds. All three are normal and it is worth knowing which you are planning for.
Is a balloon the same as a residual?
The terms are often used interchangeably in New Zealand. Residual is more common on leases, balloon on loans, but both describe an amount left owing at the end.
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