What Is a Balloon Payment?
A balloon payment, also called a residual, is a lump sum you owe at the end of your car finance term, instead of paying it off bit by bit each month.
A bank normally splits your loan into equal instalments over the full term. With a balloon, part of the capital is taken out of those instalments and left as one payment at the end.
Every instalment is lower, because you pay off less capital each month. But the capital does not disappear. You still owe it, and you pay interest on it for the whole term.
Balloon Payment Example (South Africa)
Same car, same rate, same term. The only thing that changes is the balloon. These are the inputs:
- Car price
- R350,000
- Deposit (10%)
- R35,000
- Amount financed
- R315,000
- Interest rate
- 11.75% a year
- Term
- 72 months
- Balloon
- % of the amount financed
| Balloon | Monthly instalment | Total repaid | Total interest |
|---|---|---|---|
| No balloon | R6,117 | R440,455 | R125,455 |
| 10% (R31,500) | R5,814 | R450,117 | R135,117 |
| 20% (R63,000) | R5,511 | R459,779 | R144,779 |
| 30% (R94,500) | R5,208 | R469,441 | R154,441 |
| 35% (R110,250) | R5,056 | R474,272 | R159,272 |
A 30% balloon lowers the instalment by R910 a month, from R6,117 to R5,208. But you repay R28,986 more in total (R469,441 against R440,455), because you keep paying interest on the R94,500 for all 72 months. Totals include the balloon.
The example rate is for illustration; your rate comes from the bank. Bank fees are not included. To check these figures in the balloon payment calculator, enter R315,000 as the price with no deposit, because the calculator sets the balloon as a share of the price.
Is a Balloon Payment a Good Idea?
It can be, if you have a plan for the lump sum. A balloon is a tool: it suits some buyers and hurts others.
Advantages
- A lower monthly instalment, which frees up cash every month
- Works well if you plan to sell or trade in before the balloon is due
- Useful if you expect your income to grow and can settle the lump sum later
Disadvantages
- You pay interest on the balloon every month, so the total cost is higher
- A large lump sum is due at the end, and you must plan for it from day one
- If the car loses value faster than expected, you can owe more than it is worth
| Compared | With a balloon | No balloon |
|---|---|---|
| Monthly instalment | Lower | Higher |
| Total interest | Higher | Lower |
| At the end of the term | A lump sum still to pay | The car is paid off |
| Suits | Buyers who will sell, trade in or refinance before the end | Buyers who plan to keep the car |
| The catch | You can owe more than the car is worth | A higher instalment from the first month |
What Is a Good Balloon Percentage?
A good balloon is one you can pay, refinance or cover with the car's value when it falls due. Depending on the bank, a balloon can go up to 50%. Each bank sets its own maximum, and your credit profile affects what you are offered.
The National Credit Act does not set a maximum balloon. It does require the bank to do an affordability assessment that counts the balloon as a future obligation.
A practical test: estimate what the car will be worth when the balloon falls due. If the balloon is close to or above that figure, it is too large for you.
The choice is yours
You do not have to accept the largest balloon you are offered. You can choose 10%, 20% or no balloon at all.
What Happens When the Balloon Payment Is Due?
You pay it in cash, refinance it, or sell or trade in the car to settle it. Decide which one you plan to use before you take the deal.
1. Pay the balloon in cash
If you have saved the monthly difference between a balloon and a no-balloon instalment, you may have enough to settle the balloon in full. The car is then paid off and free of any finance agreement.
2. Refinance the balloon
You can refinance your balloon payment: a new, shorter finance agreement settles the lump sum and you repay it monthly. On the R94,500 balloon in the example, at the same 11.75% rate, that is about R4,437 a month over 24 months or R3,127 over 36 months. Carfin can arrange this, and you see every cost before you sign. The refinancing guide explains the process.
3. Sell or trade in the car
Use the sale proceeds to settle the balloon. If the car is worth more than the balloon, you keep the difference towards your next car. If it is worth less, you must make up the shortfall.
If you do none of these
If you cannot do any of the above and stop paying, the bank can repossess the car. The balloon is a legally binding obligation. Plan for it before you sign.
Balloon coming due?
We can look at refinancing it.
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Can You Negotiate or Refinance a Balloon?
You can negotiate the balloon before you sign, and you can refinance it when it falls due. In between, the amount is fixed by your agreement.
- Before you sign: ask for a smaller balloon or none, and compare the total repaid, not only the instalment.
- During the term: paying extra into the account reduces what you owe at the end. Any early settlement cost is set by your credit agreement and capped by the National Credit Act; the bank's settlement letter shows the exact figure.
- When it falls due: refinancing turns the lump sum into monthly instalments, subject to the bank's normal credit and affordability checks.
