Q&A with OnlineLoans: How Can I Pay My Balloon Payment?

Online Loans

March 12, 2021

You asked, we answered.

How Can I Pay My Balloon Payment?

In short: Refinancing is an option.

But there are some things to consider

We go over what balloon payments are and how you can deal with them. Some car loans have a large payment scheduled on the last payment of the loan. This can be a considerable amount of money.

Just like a car’s major service, these payments can, at first, seem a far-off payment then suddenly hit.

What is a balloon payment?

Funny name for a serious payment. Balloon payments are one-off lump sums owed at the end of an agreed car loan term. They are sometimes referred to as ‘residual payment’.

Not all car loans have a balloon. Typically, they are an option for the borrower.

Balloon payments allow for lower regular loan repayments during the loan term. Those lower regular repayments are made up by one last large scheduled repayment. This allows borrowers to save up or prepare for the one-and-only final balloon payment.

Depending on your budgeting and preferences, balloon payments may be a positive or negative option.

Balloon payment PROS
  • Frees up more cash during the loan term as scheduled regular repayments are lower in amount

  • You can sell the car you bought with the loan to pay the balloon payment

  • Allows time to save for the final large payment
Balloon payment CONS
  • Sometimes, the cost of the loan can be higher

  • You’ll have a large bill at the end of the loan term

  • Total payable loan amounts are often higher

Generally, balloon payments are a good idea for people who plan to sell, trade in or upgrade their cars at the end of the loan term. If they keep their car’s value high, they can use the sale or trade-in value to pay out the balloon.

I want to keep my car and pay the balloon but I can’t afford it.

Solution: Refinancing. This is a great option for many people who aren’t prepared, for whatever reason, for their balloon payment.

Balloon payments can often be several thousand dollars or more. Refinancing allows you to pay the balloon out and keep your car if you don’t want to sell it.

What is refinancing?

Refinancing means taking out another loan to pay off the balloon. It may seem strange at first, taking out a loan to pay a loan, but there are benefits.

When refinancing, borrowers often find themselves able to access lower interest rates compared to their original loans. This is because they’ll have years of loan repayment history from the original loan prior to the balloon payment. Assuming they haven’t missed any scheduled loan repayments, they’ll appear a lower risk in the eyes of lenders and access lower interest rates.

How does it all work?

For example, someone borrows $30,000 over 5 years to buy a car. They have a balloon payment at the end of $8,000. This means they pay back $22,000 (plus interest) over 5 years instead of the full $30,000.

However, they’ll have to pay $8,000 at the end of the loan term – the balloon.

Refinancing covers the $8,000 balloon, allowing the borrower to pay it off slowly over time.

Below is a breakdown as an example that does not include fees. Note that interest rates, loan amounts and terms vary on the borrower’s credit history, vehicle purchased and other factors.

1. $30,000 loan over 5 years at 4.49% interest – NO balloon payment:
Repayments Per Week:

$132.47

Total Loan Term:

5 years

Balloon Payment:

None

Total Amount Payable:

$34,442

 

2. $30,000 loan over 5 years at 4.49% interest – WITH $8,000 balloon payment:
Repayments Per Week:

$104.97

Total Loan Term:

5 years

Balloon Payment:

$8,000

Total Amount Payable:

$35,292

 

3. $30,000 loan over 5 years at 4.49% interestWITH $8,000 balloon payment and $8,000 refinance at 4.74%:

Original Loan:

Repayments Per Week:

$104.97

Loan Term:

5 years

Balloon Payment:

$8,000

Total Amount Payable:

$27,292

(Total Amount Payable: $35,292 – $8,000 refinanced balloon = $27,292)

$8,000 Refinance:

Repayments Per Week:

$58.90

Loan Term:

3 years

Balloon Payment:

None

Total Amount Payable:

$9,119

(Total Loan Term: 8 years)
(Total Amount Payable: $36,411)

Other questions and answers that may help

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