If you’re confused what a balloon payment is and unsure how it impacts your monthly finance repayments Creditplus has provided an explanation
What is a Balloon Payment?
When buying your new car, certain finance products require a balloon payment at the end of the agreement. After making the last payment, you’ll be required to make one final payment if you wish to keep the car and be granted full ownership.
When is a Balloon Payment Required?
With Lease Purchase (LP), you own the car at the end of the agreement, so a balloon payment is usually required. That balloon payment can be up to 31% of the total value of the car and is specified at the beginning of the agreement.
With a Personal Contract Purchase (PCP) agreement however, you have three options;
- Pay the balloon payment to keep the car
- Return the car to the lender, although this will require the car to be in adequate condition
- Part exchange the car towards finance for another vehicle
How is the Balloon Payment Calculated?
The Guaranteed Minimum Future Value (GMFV) of a vehicle decides the size of the balloon payment. Lenders predict how much the car will be worth at the end of the finance agreement, and this is the GMFV. The decided amount is fixed at the start and will not increase, or decrease, throughout your agreement.
Do Balloon Payments mean Lower Monthly Repayments?
If there is a balloon payment at the end of your finance agreement, this will normally mean you pay less each month. In essence you are putting a large part of the loan to the end of the agreement, which could require careful budgeting if you’re looking to purchase the car at the end.