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What is a balloon payment on a car?

Balloon payments
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Why balloon payment?

What is a balloon payment on car finance?

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How do balloon payments work for cars?

Balloon payment example:

You take on a  PCP to finance a car valued at £14,000.

  • The contract is over three years.
  • The vehicle’s value at the end of the PCP is estimated at £9,000.
  • With monthly payments, you pay the difference of £5,000 (the amount the car will depreciate).
  • You’ll have the option of making the balloon payment of £9,000 at the end of the contract to own the vehicle.

Overview

In this instance, a PCP can offer lower monthly payments than other finance options such as hire purchases. You only pay the £5,000 the car depreciates and not the £14,000 the car is worth.

Monthly repayments pay off the car’s depreciation value, not the purchase price.

If you want to keep the vehicle after three years, you pay the final lump sum payment of £9,000. You will then have paid the total £14,000 value of the car.

How do you calculate a balloon payment?

The balloon payment value is the result of a separate calculation.

Purchase Price – Depreciation + Interest Charges for the Loan and Balloon Payment = The Balloon Payment.

Or, for those keen mathematicians!


Where:

  • CP = Constant payment
  • BP = Balloon payment
  • N = number of payments
  • r = Discount rate
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How is the depreciation of the car calculated?

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What do the monthly payments cover?

How can the balloon payment influence your choice of car?

The car’s depreciation affects the balloon payment

Suppose you only want the vehicle for the duration of the PCP. You have no intention of paying the lump sum when the contract ends. You’re going to give it back!

Choosing a vehicle that holds its value well will help reduce your monthly repayments. However, the optional balloon payment will be much higher for a car that depreciates heavily! Not your problem because you don’t want to keep the vehicle, but you will enjoy lower monthly repayments.

Higher depreciation of the car

the more a car depreciates, the higher your monthly payments and the lower the Balloon.

Lower depreciation of the car

the less a vehicle loses value, the lower your monthly repayments but a higher balloon.

What’s best for you?

You’ll have to determine what works best for you, but as a guide, the monthly repayments usually add up to more than the depreciation.

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Do you have to pay the balloon payment?

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

What happens if the car is worth more than the Balloon (positive equity)?

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What if you want to return the car?

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If you return a car with positive equity, will you lose the money?

What if the car value is less than the balloon payment (negative equity)?

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Can excessive damage or mileage increase the balloon payment?

A PCP agreement contains penalties for excess damage to the vehicle

Excess damage to the vehicle can affect financial penalties

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Can I refinance the balloon payment on a car?

Should you make the Balloon payment?