A car is one of the most expensive items we typically own, and it’s always worth taking the time to get the best deal possible. About 14% of Australians currently have a car loan, making this a popular method for covering the cost of our vehicle.
Car loans, though, can be expensive in themselves. The interest rate can really add up over the lifespan of a loan, amounting to significant monthly payments and cutting into your ability to save money and cover other living expenses.
A balloon payment is one way to cut down on the cost of your car loan, making it more manageable and affordable. In this post, we’ll break down what a balloon payment is and what you need to be aware of.
What Is a Balloon Payment?
A balloon payment is a one-off amount that you pay your lender at the end of your car loan. It’s essentially the final payment of the loan but is significantly larger than your regular instalments.
Why do this? Well, it can be cheaper overall. If you agree to a balloon payment, you’ll only pay interest on part of the loan principal. If your balloon payment accounts for 25% of the loan, for example, you’ll only pay interest on the first 75%, which can amount to a significant saving over time.
Here’s an example: if you take out a car loan for $40,000 (the average price of a new car in Australia) for 5 years, with an interest rate of 4.5%, you’ll be paying monthly instalments of $816.67.
If, however, you agree to a balloon payment of $10,000, to be paid as the final instalment, your monthly repayments come down to a more manageable $690.94. That frees up over $120 each month.
Why Get a Balloon Payment
- The money you save each month can go towards living expenses like groceries, clothes, hobbies, gas, and other commitments like mortgage payments, bills, and savings
- It makes the loan more affordable. The reduction in payments you get from a balloon payment can go a long way, sometimes making the difference in being able to afford a vehicle.
- Balloon payments give you several years to save the money needed to make the final payment. During this time you may come into more money, get a payrise at work, or just save the necessary amount to easily cover the cost.
- The money you save can be put towards investments, making you more money over time
- Many people choose to sell their car at the end of the loan period and use the money to cover the balloon payment
Things to be aware of with balloon payments
The loan will probably cost more overall due to additional charges. For most people, this is worth it because the individual instalments are more affordable.
The length of your loan can impact how much your balloon payment will be. Typically, longer-term loans usually mean you have to work with a lower maximum balloon payment.
Balloon payments are typically quite large. Even though you agree to this payment in advance and have many years to collect the money, it can still be a challenge. If you forget about the payment, or underestimate it, you could find yourself in trouble.
You can’t always rely on the resale value of the car to cover the balloon payment. Cars can depreciate over time, and you could end up owing more than the value of a sale.
As long as you take care to find the right loan and plan appropriately, a balloon payment can be a very useful way to buy a new vehicle in an affordable way. It’s always best to work with a professional broker, who can help you find the right deals and the best plan for your personal circumstances.
I’ve been helping people in and around Mackay, Queensland find the best deals on car loans for years. Get in touch to find out how I can help you do the same.
