The short version
A balloon payment is a lump sum you still owe at the end of an asset finance term. You don't pay the whole loan off in monthly instalments. Instead you set part of it aside, the balloon, and pay that amount in one go at the end.
You get smaller monthly repayments. In return you pay interest on the balloon amount the whole time, so the loan costs more overall. When the term ends, the balloon is due, so you need a plan for it.
What is a balloon payment?
It is part of the loan set aside to be paid at the end, instead of being 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 of the loan over those five years. The other $30,000 is the balloon. At the end of year five, that $30,000 is due.
Balloons are common on asset and equipment finance, such as vehicles, trucks and machinery. The bigger the balloon, the smaller your monthly repayment and the bigger the bill at the end.
To see a 20% balloon on real numbers, our work ute cost comparison runs it across five popular utes.
Why lenders offer them
A balloon lowers the monthly repayment, which frees up cash now. For a business that needs the asset earning before it can comfortably pay it off, that can decide whether the deal works.
It also roughly matches the loan to the asset's working life. A truck earns money over its working years, and the balloon lets you keep more cash in the business while it does.
Lower monthly repayments don't make the loan cheaper overall, though. You pay interest on the balloon amount for the full term and still owe it at the end. A loan with no balloon costs more each month and less in total.
What sets the size of the balloon
Mostly three things:
- The asset. Lenders base the balloon on what the asset is likely to be worth at the end. A truck that holds its value can carry a bigger balloon than tech that dates quickly.
- The term. Longer terms usually mean smaller balloons, because the asset has more years to age.
- You. Stronger businesses get more choice. A lender may cap the balloon on a newer ABN or an older asset.
Balloons usually range 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 is due, you can:
- Pay it out. Clear the balloon and own the asset outright. This is best if the asset still earns money and you have the cash.
- Refinance it. Roll the balloon into a new, smaller loan and keep the asset. This is common, and a broker can set it up before the balloon is due so there is no gap.
- Sell or trade in 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 pay the difference.
The risk is reaching the end with no plan and an asset worth less than the balloon. Decide how you will pay it when you set the balloon, not five years later.
Getting the balloon right for your business
A balloon helps cash flow, but you still pay for it. Set it too high to get 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. Getting that right is what a broker does before the application goes in. The application form takes under a minute, and most enquiries get a reply within four business hours.