What is a Car Balloon Payment and How Does It Work?

Balloon financing means reducing your monthly car payments now, but making a large “balloon payment” at the very end of the loan. After that, you can break out the balloons and celebrate.

Using a balloon payment for your car has some advantages, but not all vehicles qualify, and that final payment can be rough.

What is a balloon payment on a car loan?

With a balloon payment on a car loan, you make smaller monthly payments and then pay a final larger lump sum at the end of the loan term. This type of financing is also used for mortgages and business loans.

Be aware that the final payment could be as much as half the vehicle’s value.

How does balloon financing work?

While a balloon loan may offer lower monthly payments, it’s important to consider the potential risks.

In a traditional auto loan, the debt is evenly divided across the whole loan term. Each month’s payment is the same.

In a balloon loan, however, the monthly payments are lower, but then the final payment (or “balloon”) for the rest of the loan balance is much larger.

Balloon loans are usually available for terms of 24 to 72 months. They will also usually have a higher interest rate than traditional auto financing.

Like a traditional auto loan or lease, you will have to qualify for the loan based on your credit score — you can check yours for free at LendingTree Spring. You may also have to make a down payment.

You can shop around for the best auto loan rates. But remember that while your monthly payments may be lower (except for the final one), balloon financing can end up being more expensive overall. Consider the example below:

Example of auto balloon financing

Summary: The traditional loan here would cost $631 less.

Balloon financing vs. leasing

While balloon financing seems similar to leasing, there are some differences you should be aware of.

Like a closed-end lease, monthly payments are usually lower because you’re not paying for the entire value of the car during the financing term. But unlike a typical closed-end lease, you can’t walk away from the vehicle when the balloon payment is due — you must make the final balloon payment.

With balloon financing, you own the car, just like with traditional financing. You can sell or trade in the car to make the final payment, and you don’t have to worry about mileage and condition limitations, like with a lease.

Some car manufacturers’ finance companies, such as Ford Credit, allow you to turn the car in or trade it in on a new vehicle without paying the principal balance on a loan with a balloon payment.

Hyundai Motor Finance offers balloon loans with the final payment based on the vehicle’s estimated residual value at the end of the term. A deal like this is similar to a lease: It includes mileage caps and excessive wear and tear fees, so that the balloon payment here resembles a lease buyout.

Pros and cons of a balloon payment loan

The main reason to opt for a balloon payment plan is the lower monthly payment, which can be a big advantage.

On the other hand, you’ll have to face that big final payment. Sometimes you can get a new loan to meet the balloon payment, but probably not if your car loan is upside-down (meaning the vehicle is now worth less than the final payment).

Missing payments — even just the final payment — could impact your credit score, and the lender could repossess the car.

If you can’t afford traditional financing, you may want to consider a less expensive car instead of backloading much of the debt into the final payment.

That said, balloon payments might be an option for financing antique/classic cars and exotic cars that may hold their value better than other vehicles.

Options at the end of a balloon payment

Unless your balloon loan comes with lease-like financing that allows you to turn the car back in or trade it for a new vehicle, you’ll need to cover the final lump-sum payment.

Depending on your loan details, you’ll have a few options for retiring the loan:

• Make the balloon payment in cash. If your financial situation allows you to pay the balloon payment directly, then, of course, the car is yours to keep.
• Sell your car. You can sell your car yourself or through a marketplace and then apply the money to the balloon payment. Still, there’s no guarantee that the sale will be enough for the whole payment.
• Trade in your car. If you trade in your car at the same dealer, you may be able to roll over the amount you owe into a new loan or simply walk away from the car.
• Return the car. Depending on the loan, you might be allowed to give the car back to the dealer and walk away, just like a lease. However, you may still owe extra fees, including excess mileage or wear-and-tear charges.
• Refinance your car. If you want to keep the vehicle but don’t have the cash ready for the balloon payment, consider refinancing with a used car loan. You might be able to refinance even with bad credit or even if the loan is upside-down.