Car finance with balloon payment
In this article we wanted to explain what a balloon payment is, how they work and what your options are when it comes to applying for car finance.
What is a balloon payment?
A balloon payment, which is also known as an optional final payment, is a lump sum owed to the lender, or car dealership, at the end of a car finance agreement. They’re typically associated with a personal contract purchase (PCP), where the monthly repayments are usually lower, which results in a balloon payment being owed at the end of the agreement if you wish to keep the vehicle.
How do they work?
When you take out PCP car finance, your monthly repayments are actually based on the depreciation value of the vehicle and not the purchase price. So for example, if the car you buy costs £20,000 and it’s expected to be worth £12,000 in three years when your agreement ends, then your payments will be based on the depreciation of £8,000. The balloon payment in this example would be £12,000 which would be an optional payment at the end of your term.
You have a few options at the end of the term:
- You pay the balloon payment and take ownership of the car
- You can hand the car back with no further payments required
- You can part-exchange the car, settling the balloon payment, and using any further equity to put towards a new one.
Can I get car finance without a balloon payment?
Yes, there’s other finance options available that don’t require a balloon payment at the end. In fact, Zutos most popular type of car finance is a hire purchase agreement which spreads the full cost of the vehicle into affordable monthly repayments. At the end of the term, you would’ve paid off the whole agreement, meaning a balloon payment isn’t required.
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When taking out car finance which has a balloon payment at the end, always consider your options before making that final decision. Sometimes the car could be worth more than the balloon payment so purchasing it and selling privately could be a good option
Mike has worked at Zuto since 2018 and uses his experience within the industry to help customers understand the ins and outs of car finance.