Balloon payment
A lump sum left owing at the end of a loan, which makes the regular repayments smaller.
A balloon payment, also called a residual payment, is a lump sum left owing at the end of a loan and paid in one go. The regular repayments pay off the rest, so they are smaller, but the balance stays higher for longer and the loan generally costs more in total. Some car and equipment loans offer one, set as an amount or as a percentage of the amount borrowed.
The repayment is worked out on the loan less the value today of the balloon: (loan − balloon × (1 + r)^−n) × r ÷ (1 − (1 + r)^−n), where r is the rate per repayment and n the number of repayments. The balloon is then paid with the last repayment, from savings or from selling what the loan bought.
Worked example
$45,000 at 8.5% over five years is $923.24 a month. With a 30% balloon of $13,500, the repayment falls to $741.90 a month and the $13,500 is paid with the last repayment. The balloon adds $2,619 of interest over the five years.
Common mistake
Choosing a balloon for the lower repayment without a plan for the lump sum. If the car is worth less than the balloon when it falls due, selling it does not cover what is still owed.
Grounded in Moneysmart (ASIC) — Car loans guidance. Figures last checked . General information, not tax advice.
Related terms
Loan amortisation
Paying a loan off in equal repayments that move from mostly interest to mostly principal.
Interest-only loan
A loan whose repayments cover only the interest for a set period, so the balance does not fall.
Offset account
A transaction account linked to a home loan whose balance is taken off the loan before interest is charged.
ABN (Australian Business Number)
The 11-digit number that identifies your business.
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Questions about this term
Balloon payment: common questions
- Is a balloon payment the same as a residual payment?
- Yes, in car finance the two names are used for the same thing: the lump sum left owing at the end of the loan. Moneysmart calls it a balloon payment, also called a residual payment.
- Can a balloon be paid down before the end of the loan?
- Extra repayments during the loan bring the balance down, so less is owed when the balloon falls due. Whether extras are allowed, and whether repaying early costs a fee, depends on the loan; Moneysmart notes that variable rate car loans usually have no early exit fee.
- How is a balloon payment worked out?
- Usually as a percentage of the amount borrowed: 30% of $45,000 is $13,500. The regular repayment then covers the loan less what that balloon is worth today, so the bigger the balloon, the smaller the repayment and the more interest over the loan.
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