Balloon payments, explained properly
A balloon makes the monthly number smaller. That is the whole of its appeal and it is why it is offered to you across a desk. It does not make the car cheaper.
What it is
A balloon — a residual — is a slice of the price you agree not to repay during the term. You pay interest on it for the whole term, and the capital falls due in one payment at the end.
The part that catches people
A car loses value faster than a balloon agreement reduces what you owe. For much of the term you can owe more than the vehicle is worth — so if it is written off, stolen or you simply need to sell, there is a gap and the gap is yours. Shortfall cover exists for exactly this and is worth asking about.
And at month 60
You settle it, or you refinance it. Refinancing means borrowing against a five-year-old vehicle, which is a higher rate over a shorter term. That is how a car people thought they had nearly paid off becomes another four years of instalments.
When it does make sense
- You have a definite source for the lump sum — a trade-in cycle you actually run, or money you know will be there.
- The vehicle holds residual value well and you replace on a fixed cycle anyway.
- It is a business vehicle and the cash flow timing is the point.
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