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The Zuto guide to car finance with a balloon payment

If you’re in the market for a new car, you might be considering car finance to help spread the cost over a number of years. If so, you’ve probably seen some deals that mention a balloon payment. 

But what is a balloon payment on car finance? Is it an optional payment? And can the cost of a balloon payment change? This Zuto guide explains everything you need to know about car finance with balloon payments.


What is a balloon payment car finance?

A balloon payment - also known as an optional final payment - is a lump sum owed to the lender at the end of a car finance agreement.

Car finance balloon payments are used to help keep down the cost of the monthly repayments and are usually a feature of personal contract purchase (PCP) deals. 


How do balloon payments work?

When you take out Zuto PCP car finance, your monthly repayments are based on the depreciation value of the vehicle and not the purchase price. That sounds quite complicated, but here’s a straightforward example of how it works:

  • You use PCP car finance to buy a car that’s worth £20,000
  • The finance runs for three years
  • The car is expected to be worth £12,000 at the end of the PCP deal
  • This means you pay finance on the £8,000 depreciation value
  • You’ll have an optional balloon payment of £12,000 at the end of your term

In this example, PCP car finance can offer lower monthly repayments than other types of finance, as you’re only borrowing £8,000 to cover the deprecation value instead of the £20,000 that the car costs.

If you then want to keep the car at the end of the three years, you’ll need to pay £12,000 to cover the balloon payment and the total £20,000 cost of the car. But that’s not the only option available to you.

How is a balloon payment calculated?

A balloon payment is calculated based on the Guaranteed Future Value (GFV). The GFV is what your lender estimates the car value will be at the end of your contract, regardless of depreciation.

The GFV is set at the beginning of your contract and it’s what you agree to pay your balloon payment if you choose to buy the car.

A few factors affect GFV, including:

  • Car make
  • Car model
  • Fuel type
  • Estimated mileage
  • Contract length

What happens when a balloon payment is due at the end of a PCP deal?

When your PCP deal is coming to an end and it’s time to pay the lump sum, your lender will give you four options:

  1. Make the balloon payment so you own the car - If you have the money, you can make the optional final payment and own the car outright.
  2. Return the car - If you don’t have the money available, or you just don’t want the car, you can return it without having to make any more payments.
  3. Part-exchange the car - If the value of the car is higher than the optional final payment at the end of the term, you may have the option to trade it in and use the surplus money - known as equity - as a deposit on another car. This can also help to cut the monthly repayments on the new car.
  4. Refinance the vehicle – if you can’t afford the balloon payment, Zuto work with a few lenders who will refinance the balloon payment so you can keep the car.


Can a car finance balloon payment change?

No. The balloon payment is set at the start of your agreement and so it can’t be increased or decreased. But you will have to stick to certain mileage and maintenance conditions as part of your finance arrangement. This is because the dealer will base the depreciation value of the car on a set of usage assumptions.

If you stick to these finance conditions, you’ll have no issues at the end of the term, and you can simply take one of the three options listed above. 

If the car has depreciated more than expected - known as negative equity - your balloon payment won’t change and you won’t be charged any additional fees. And if the value of the car ends up being higher than the pre-agreed value, you’ll still be able to buy the car for the amount previously agreed.


Is balloon payment finance right for you?

Before you take on any finance deal, it pays to weigh up the advantages and disadvantages and use a car finance calculator to work out how much you can afford. 

PCP finance is available to people with a range of credit scores and are sometimes available to people with a lower credit rating. But bear in mind that borrowing usually costs more if you apply for poor credit car finance.


What are the advantages of balloon payments on car finance?

  • Low or no initial payments - Many car finance no deposit deals are available, which means you’ll not have any upfront costs.
  • More affordable monthly repayments - PCP deals often have lower monthly repayments than other deals, because you’re only borrowing a portion of the car’s total value.


What are the disadvantages of balloon payments on car finance?

  • The final balloon payment can be high - Although the monthly repayments can be lower than on other types of car finance, you might find yourself faced with a huge lump sum when the deal ends. If you can’t pay it, you can’t keep the car.
  • You might never own the car - If you want to keep the car, you’ll need to find the money to make the balloon payment – you could do this through savings, a personal loan, or even refinance using a HP product. If you always hand the car back and take on another PCP deal, you’ll never actually own any of the vehicles you’ve been paying for.


Can I get car finance without a balloon payment?

Yes. There are other finance options available that don’t need you to make a balloon payment at the end. At Zuto, we also compare hp finance, which can also spread the full cost of the vehicle into affordable monthly repayments. But, unlike PCP, no balloon payment is needed as you pay off the entire value of the car over the term of the loan. The loan is secured against the value of the car, which means you don't own the vehicle until the last payment is made.


When taking out car finance with 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.

Written by

Mike Barlow

Content Manager

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.

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