What is a car loan balloon payment and how does it work?

When someone takes out a car loan, they may be given the option of repaying the loan through two different structures – one with a balloon payment and one without.

For borrowers who take out a car loan without a balloon structure, they repay the loan through a series of regular monthly payments. Once they’ve paid the final monthly instalment, the loan is cleared.

For borrowers whose car loan has a balloon structure, they need to make their regular monthly repayments – and then, at the end, make the balloon payment (a one-off lump sum). Only then is their loan cleared. This can lower the repayments.

Regular car loan vs balloon car loan

Both options have pros and cons:

• Without a balloon structure, the borrower makes higher monthly repayments but pays less over the life of the loan.
• With a balloon structure, the borrower makes lower monthly repayments but pays more over the life of the loan (once the balloon payment is added at the end).

Which option is best?

There’s no one ‘best’ option, because it depends on the borrower’s unique circumstances.

For someone who believes they’d be able to make higher monthly repayments from the beginning to end of their loan, a regular structure might be more suitable, because they’d pay less over the life of the loan.

For someone who’d prefer to make lower monthly repayments – perhaps because they’re short on funds or would prefer to deploy the extra money elsewhere – a balloon structure might be more suitable, assuming they’d be able to cover the balloon payment at the end of the loan.