Balloon payments, explained plainly.

What a balloon payment is

A balloon payment is a lump sum due at the end of a finance agreement. Rather than repaying the whole balance across the monthly payments, part of it is set aside and paid in one go when the agreement finishes.

You will meet it under different names. On a Personal Contract Purchase it is the optional final payment. On a Lease Purchase it is a final payment you are required to make. On a bespoke agreement for a higher-value car it is often simply called the balloon. The idea is the same in each: some of what you owe is deferred to the end.

Why it lowers the monthly payment

The monthly payments only have to repay the part of the balance that is not deferred. The bigger the balloon, the less there is to spread across the term, and the lower each monthly payment becomes.

That is the whole appeal, and for many people it is a good reason: it makes a better car, or a more comfortable monthly figure, possible.

What it costs you instead

The deferred amount does not disappear. You still owe it, and interest is generally charged on the full amount outstanding, deferred part included, for the whole of the term. So an agreement with a balloon will usually cost more in total than one that repays the same amount over the same term.

That is why the total amount payable is the figure worth comparing between agreements. The monthly payment tells you what an agreement feels like; the total tells you what it costs.

The question to ask first: optional, or required?

This matters more than anything else about a balloon, and the names do not always make it obvious.

• On a PCP, the final payment is optional. At the end you can pay it and keep the car, hand the car back, or put any equity towards the next car — subject to the terms of the agreement, which usually include the car's condition and a mileage allowance.
• On a Lease Purchase, and on many bespoke agreements, the final payment is contractual. There is no option to hand the car back instead: the balloon is a debt you will pay, one way or another.

Neither is better. An optional payment buys flexibility; a required one is often used where the car is expected to hold its value well or where flexibility at the end is not the point. What matters is knowing which one you are signing.

How the size of the balloon is set

The lender sets it. On a PCP it is based on the lender's forecast of what the car will be worth at the end of the agreement, which depends on the car, the length of the term and the mileage you expect to cover. On other agreements there is more room to shape it around what you want, within what the lender will agree to.

A larger balloon is not automatically a better deal. It lowers the monthly payment, but it raises what you need to plan for at the end and, usually, what you pay overall.

Planning for the end

The time to decide how a balloon will be paid is at the start, not in the final month. The usual routes are paying it from savings, selling the car and settling the agreement from the proceeds, or putting the car towards the next one.

If the car is worth less than the balloon when the time comes, selling it will not cover what you owe. On a PCP, that is what the option to hand the car back is for. On an agreement where the balloon is required, the shortfall is yours to meet.

Before you sign

Four questions cover most of it:

• Is the final payment optional or required?
• What is the total amount payable, not just the monthly figure?
• Is there a mileage allowance, and what does exceeding it cost?
• How do you expect to pay the balloon when the time comes?

This guide is general information, not advice about your circumstances. Every agreement is different, and any finance is subject to the lender's approval.