The short version
A balloon payment is a lump sum you still owe at the end of an asset finance term. Instead of paying the whole loan off in monthly instalments, you park a slice of it, the balloon, and settle that amount in one hit at the end.
The upside is smaller monthly repayments. The trade-off is that you pay interest on the parked amount the whole way through, so the loan costs more overall. And when the term ends, the balloon is due. You need a plan for it.
Here is how they work, what they really cost, and what to do when the balloon comes due.
What is a balloon payment?
It is a portion of the loan set aside to be paid at the end, rather than spread across the monthly repayments. It is also called a residual, especially on leases.
Say you finance a $100,000 truck over five years with a 30% balloon. You make monthly repayments on $70,000 worth of the loan across those five years. The remaining $30,000 sits there as the balloon. At the end of year five, that $30,000 is due.
Balloons are common on asset and equipment finance: vehicles, trucks, machinery. The bigger the balloon, the smaller your monthly repayment, and the bigger the bill at the end.
Why lenders offer them
A balloon lowers the monthly repayment, which frees up cash flow now. For a business that needs the asset earning before it can comfortably pay it off, that can be the difference between the deal working and not.
It also loosely matches the asset to its life. A truck earns money across its working years, and the balloon lets you keep more cash in the business while it does.
But cheaper monthly does not mean cheaper overall. You are paying interest on the balloon amount for the full term, then still owing it. A loan with no balloon costs more each month and less in total.
What sets the size of the balloon
Three things, mostly:
- The asset. Lenders set balloons against what the asset is likely to be worth at the end. A truck that holds value can carry a bigger balloon than fast-ageing tech.
- The term. Longer terms usually mean smaller balloons, because the asset has more years to age.
- You. Stronger businesses get more room to choose. A lender may cap the balloon on a newer ABN or an older asset.
Balloons commonly run from 0% up to around 50% of the amount financed. Where yours lands depends on all three.
Your three options when the balloon is due
When the term ends and the balloon lands, you have three moves:
- Pay it out. Clear the balloon and own the asset outright. Best if the asset still earns and you have the cash.
- Refinance it. Roll the balloon into a new, smaller loan and keep the asset. Common, and a broker can line it up before the balloon is due so there is no gap.
- Sell or trade the asset. Use the sale to clear the balloon. This only works cleanly if the asset is worth at least the balloon. If it is worth less, you cover the shortfall.
The trap is reaching the end with no plan and an asset worth less than the balloon. Decide the exit when you set the balloon, not five years later.
Getting the balloon right for your business
A balloon is a cash-flow tool, not free money. Set it too high to chase a low monthly repayment and you can end up owing more than the asset is worth. Set it at zero and you tie up more cash than you need to.
The right size depends on how long you will keep the asset, what it will be worth then, and how tight cash flow is now. That is a structuring call, and it is what a broker does before the application goes in. The application form takes under a minute, and most enquiries get a response within four business hours.