Quick answer
A balloon payment loan has smaller regular repayments and a final lump sum due at the end of the term, also called a residual. Moneysmart notes that the lump sum is repaid with interest, so the loan usually costs more overall. It can suit business assets that hold their value, provided you have a clear plan for the final payment.
Key points
- A balloon, or residual, is part of the loan deferred to the end of the term.
- Regular repayments are lower, but Moneysmart notes the loan usually costs more overall.
- At the end you can pay it out, refinance it, sell or trade the asset, or in some cases roll over.
- The asset may be worth less than the balloon, so plan for the gap.
What is a balloon payment?
A balloon payment is a lump sum due at the end of a loan. Instead of paying off the full amount through regular repayments, you pay down part of the debt, and the rest is deferred to a final payment. The same lump sum is often called a residual or a residual value. Moneysmart describes it as a final lump sum due at the end of the term.
You most often see balloons on vehicle and equipment finance, where the asset is expected to hold a reasonable share of its value for the loan term. Lenders set the balloon with reference to that expected value, subject to their own policies.
How does a balloon change my repayments?
Because part of the debt is left until the end, the regular repayment is lower than for a loan with no balloon. That can improve cash flow in the meantime. Moneysmart notes that the regular repayments are smaller, which can make the loan look cheaper.
The catch is the second half of the story. Moneysmart says the lump sum is repaid with interest, so the loan usually costs more overall. The debt is not shrinking as quickly, so interest is charged on a larger balance for longer. A balloon shifts cost into the future and increases the total.
What are the options when the balloon falls due?
Depending on the product and lender, the choices at the end commonly include:
- Pay it out from savings or cash flow.
- Refinance it into a new loan, subject to assessment at that time.
- Sell or trade the asset and use the proceeds to repay the lump sum.
- Return the asset, in some lease-style products where that is allowed.
- Roll it over, in some cases, again subject to the lender’s approval.
None of these is guaranteed. Moneysmart advises being sure you can pay the lump sum when it is due. The sensible approach is to choose the balloon with the end in mind and to talk to your lender or broker well before the date.
Which products use balloons?
| Product | How a balloon or residual features |
|---|---|
| Chattel mortgage | Optional balloon at the end; you own the asset from the start |
| Hire purchase | Optional balloon; ownership usually passes after the final payment |
| Finance lease | Residual value set at the start; end-of-lease options apply |
| Car loan | Balloon on some secured vehicle loans |
| Equipment loan | Residual tailored to the equipment and its life |
Our guide to chattel mortgages and the pages on balloon and residual finance, hire purchase and finance leases explain how each product treats the final amount. Tax treatment differs between products and businesses, so your accountant should confirm the position and the ATO’s business pages are the place to check the rules.
What risks should I weigh?
- Shortfall risk. If the asset is worth less than the balloon, you owe the difference. Moneysmart warns that the price you get may not cover the full debt.
- Cash-flow risk. If you have not saved, the lump sum can arrive at a bad time.
- Refinance risk. A lender may reassess you at the end of the term. Circumstances change, and approval is not assured.
- Higher overall cost. Smaller repayments cost more in total.
- Wear and tear. Heavy use, kilometres or hours can reduce the asset’s value faster than expected.
A balloon that is conservative relative to likely value is easier to manage than an aggressive one.
Who might a balloon suit?
Balloons tend to suit borrowers who:
- Use assets that hold value, such as late-model vehicles or quality equipment.
- Want to protect cash flow in the early years of a business or contract.
- Plan to upgrade and trade the asset at the end of the term.
- Have a defined way to deal with the final amount.
They suit less well where the asset depreciates quickly, the borrower expects tight cash flow throughout, or there is no plan for the lump sum.
An illustrative example
This is an illustrative scenario only.
A tradie buys a ute for the business and wants lower monthly repayments while the business grows. He chooses a chattel mortgage with a moderate balloon. During the term, he keeps the ute serviced and notes the kilometres. Three months before the end, he talks to his broker about whether to pay out the lump sum, refinance it or trade the ute.
Because he planned ahead, he has options. Had he ignored the balloon until the due date, he might have had to sell quickly or accept whatever refinance was available. See our page on tradie ute finance for how such loans are set up.
How does this apply to trucks and equipment?
Trucks, machinery and equipment often keep resale value for years, which is why balloons are common in that area. The residual still has to be realistic. Heavy hours, specialised use or niche models can weaken resale value, and lenders take that into account. Our pages on truck finance and car loans set out how these loans are arranged.
What mistakes should I avoid?
- Picking the biggest balloon to get the smallest repayment.
- Having no plan for the final payment.
- Assuming the asset will be worth more than the balloon.
- Forgetting the extra interest cost.
- Ignoring tax and GST treatment until the end.
- Not reading the end-of-term conditions in the contract.
How does Ownright help?
We compare structures across lenders, explain what a balloon does to your total cost and help you choose one that matches the asset and your cash flow. Trevor Scott’s team arranges vehicle, equipment and business finance Australia-wide, including for borrowers with less-than-perfect files. If you are weighing a residual on an upcoming purchase, send us the details and we will compare structures.
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Frequently asked questions
What is a balloon payment?
It is a lump sum due at the end of a loan, which means the regular repayments only cover part of the debt. Moneysmart describes it as a final lump sum, also called a residual payment. Lower repayments during the term are the attraction, but the lump sum has to be dealt with at the end.
Does a balloon make the loan cheaper?
Repayments are lower, but the loan usually costs more overall. Moneysmart notes the balloon amount is repaid with interest, so because less of the debt is cleared during the term, more interest builds up. Whether it suits you depends on cash flow, how you use the asset and your plans.
What are my options when the balloon falls due?
Common options are paying it from savings, refinancing the amount into a new loan, selling or trading the asset and using the proceeds, or in some arrangements returning or rolling over the asset. Which options exist depends on the product and the lender, so check the contract before signing.
What if the asset is worth less than the balloon?
You would still owe the balance. Moneysmart warns that the price you get for a vehicle might not cover the full debt, leaving you owing money after a sale. Choosing a conservative balloon and keeping the asset in good condition reduces the risk of a shortfall.
Are balloons only for vehicles?
No. They are also used for trucks, machinery, equipment and other business assets, particularly on chattel mortgages, leases and hire purchase. The structure suits assets that keep a good portion of their value, though how it works and how it is treated for tax can differ, so ask your accountant.