Our guide to car finance balloon payments
Car finance terminology is often viewed as complex jargon, but we’re here to show you that it doesn’t have to be that confusing
)
The ‘balloon payment’ in car finance is essentially the final payment you make if you wish to keep the car after your Personal Contract Purchase (PCP) finance agreement ends.
This is an optional payment, meaning you can either purchase the vehicle outright, swap it out for a new finance deal on another car, or simply just hand it back.
What's an example of a balloon payment?
If you financed a car for £40,000 and the balloon payment figure was set at 25%, you would then have to pay £10,000 at the end of your term if you wanted to keep the car.
It should be noted that no matter how much the car’s value fluctuates, your balloon payment will not go up, making it a fixed cost.
Do I have to pay the balloon payment?
You don’t have to pay the final balloon payment as this is purely optional, and is agreed ahead of your agreement.
At the end of your PCP car finance deal, you will have three options:
Pay the balloon payment in full and keep the car
Begin a new finance deal on the same car or on another model
Hand the car back
How will my balloon payment be calculated?
The balloon payment is essentially calculated through the expected depreciation of your car – also called the Residual Value (RV) or Guaranteed Minimum Future Value (GMFV) – and is agreed before you sign your agreement.
What factors are considered to calculate my car’s Residual Value?
Exact make and model of the car
How many miles you expect to do per year
Total length of the agreement
What if my car has appreciated or depreciated over the course of my finance deal?
It doesn’t matter if your car is worth more or less of what the finance company predicted – your balloon payment will remain the same.
Sometimes the finance company will get the prediction wrong because car values are constantly changing. For example, if the car is worth more than the agreed residual value and you decide not to purchase it, then you will have something called positive equity, which you can use to put towards another car – you cannot swap it for cash.
Should I opt for a balloon payment?
There are benefits and drawbacks to choosing a balloon payment.
Benefits
A large balloon payment is likely to mean your monthly payments will be lower.
If you love your car, you can keep it if you’re able to make the balloon payment.
When your term ends, if your car is worth more than the lender estimated, you could make the balloon payment and then sell the vehicle for a profit.
Downsides
It can be difficult to afford the large balloon payment at the end of your contract if you want to keep the car.