What is a balloon payment?
A quick overview
A balloon payment is a lump sum due at the end of a loan term. It reduces your monthly repayments and is common in vehicle and equipment finance.
If you’ve ever financed a car or piece of machinery, you’ve probably heard the term balloon payment. It’s a lump sum left at the end of a loan that you pay in exchange for making smaller repayments during the term. Balloon payments are used to lower your monthly costs and can give you more control over your cash flow. In this article, we’ll explain what they are, how they work, and when it makes sense to use one.
More about balloon payments
A balloon payment is just a one-off lump sum due at the end of a business loan (or personal loan). It’s very similar to having a residual value.
It’s the amount held back from your repayments and paid after the loan term finishes. By leaving this amount to the end, your monthly repayments are lower.
For example, if you’re financing a $50,000 ute with a $10,000 balloon, your repayments are based on $40,000. You pay the $10,000 later. Balloon payments give businesses (and individuals) more flexibility during the loan. But they require forward planning to cover the final cost. They are used across many loan types, especially for vehicles and equipment finance.
Balloon payments in the context of asset finance in Australia
Balloon payments are popular in Australian asset finance, especially for chattel mortgages and commercial hire purchases. They’re used to align repayments with cash flow and to avoid tying up capital. Most lenders will let you choose a balloon amount based on the term and asset.
The ATO also provides safe harbour guidelines to keep things compliant. At the end of the term, you can pay the balloon out, refinance it, or sell the asset to cover the amount. A good broker will help you structure this part of the loan from day one.
Let’s say a transport company in NSW finances a $90,000 Ford Ranger Wildtrack with a 25 percent balloon. This leaves a $22,500 payment due at the end of the term. Their monthly repayments are now going to be much lower, which helps while they scale up. When the loan ends, they choose to refinance the balloon and keep the ute in their fleet.