Definition
A balloon payment is a larger final instalment left owing when a loan finishes, seen most often on vehicle and equipment finance such as chattel mortgages. Deferring part of the debt makes each regular repayment smaller, yet the overall cost generally rises because a bigger balance sits on the loan for the whole term. It must be paid, refinanced or covered by selling or trading in the asset.
A balloon makes vehicle and equipment finance feel more affordable month to month. It does not make it cheaper.
How it works
The schedule is worked out so that an agreed sum is still outstanding on the final day. That remaining amount is the balloon. Regular repayments are lower because that part of the loan is not paid down during the term.
The trade-off
Expect to pay more overall, and decide early how the lump sum will be met. Should the vehicle or machine be worth less than that final sum, the shortfall comes out of your pocket.
Size it safely
Be cautious when guessing what the asset will fetch on the last day, and set the balloon comfortably under that guess. Our guide to balloon payments has a step-by-step approach. For vehicle or equipment finance structured to suit you, make one enquiry.
Common questions
How does a balloon differ from a residual?
They are similar lump sums at the end of a term. Balloon usually refers to loans; residual usually refers to leases.
How big should a balloon be?
Ideally below the asset's realistic value at the end of the term, so a sale or trade-in can cover it.
Sources and further reading
Related terms