Balloon Payment Car Finance: How It Works & Your Options

Reaching the end of your PCP or a HP-with-balloon deal? This guide helps you understand what a balloon payment is. We will show you how lenders decide on it, what your settlement figure covers, and your options at the end of the loan. You can pay the amount, refinance, return the car, or part exchange it for a new car or used car. You will find a simple, step-by-step method to work out the balloon payment amount for a balloon loan. We cover how it compares to a traditional loan, and there are practical tables for checking your monthly payments and total cost. Always remember to compare car finance deals. The interest rate and fees can change the outcome by several hundred pounds.

What is a balloon payment in car finance?

A balloon payment is a large final payment you need to make at the end of a loan. In Personal Contract Purchase (PCP), this is called the Guaranteed Future Value (GFV). The GFV is the lender’s guess at the value of the car at the end of the term. This amount is there if you meet the mileage limit and the fair wear rules.

Some HP deals also use a final balloon payment to make the monthly payments lower. But classic HP does not have this balloon. That means you pay off the full car cost over the whole term.

Key terms you’ll see in a PCP/HP agreement

What are my options at the end of the contract?

You usually have four choices when the contract ends, if you are using PCP or HP with a balloon payment.

How is the settlement figure calculated?

Your settlement figure is the amount you still have to pay if you want to finish or clear your agreement with your finance provider on a set date. At the end of your agreement (PCP), this is usually the final balloon payment plus a small option or purchase fee. If you want an early settlement during the term, UK rules say you get some of the future interest back, but lenders may also add a small settlement fee if this is in the contract. You should always ask for a written quote before you make your choice.

Worked example: same car, different balloons (illustrative)

Assumptions you can use for your own numbers: the cash price is £20,000. The loan amount you have after the deposit is £18,000. The loan term is set for 48 months. The APR is 9.9%.

Takeaway: Balloons help you get smaller monthly payments now. But if you pay the balloon later, the total cost to own the car can be higher than HP. If you want to own the car, look at a lower balloon or see what it is like with no balloon before you decide. Always compare car finance with different lenders.

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Equity at the end: do you have a deposit or a shortfall?

Equity is what you get when you take the value of your car at the end and subtract the balloon amount and any fees.

• Positive equity → this is often a good option to part exchange when you get your next car. Any equity you have will be your first deposit.
• Negative equity → you might want to give back (PCP), wait before you change, or put more cash in. It is usually better not to add the shortfall into a new loan.

The easy way to check your balloon (no formulas needed)

Think of a balloon loan like this. The payments are set up as if you will pay the loan over a longer term, such as 60 months. But, the agreement ends sooner, like in 36 months. Whatever is left to pay after 36 months becomes your balloon payment amount. This is called a balloon payment.

Five simple steps using any loan calculator

1. Put in the loan amount. This means the price, minus your deposit or any part-exchange.
2. Put in the interest rate (APR). The tool will do all the maths, like working out compounding.
3. Choose the amortisation term. This is how long it will take to pay off “as if” you wanted low monthly payments, for example, over 60 months.
4. Choose the actual loan term. This is when the contract ends, like 36 months.
5. Check the results. The calculator shows your low monthly payments and the remaining balance at month 36. This balance is the large payment that comes at the end of the loan (the balloon payment). It’s time to decide if you want to pay, refinance, give the car back (PCP), or part exchange.

Example (illustrative, not a quote)

• Loan amount: £18,000
• APR: 9.9%
• Amortisation term: 60 months (this sets what the monthly payment will be)
• Loan term: 36 months (this is when the loan ends)

A typical calculator will show:

• Monthly payment: This is about £382.
• Balloon at month 36: This is about £8,270.

That £8,270 is the last payment. You can pay it, get a new loan to cover it, or give the car back on a PCP. You must be within the agreed mileage and make sure the car is in fair wear.

Balloon vs no-balloon at a glance (same inputs)

Should you refinance the final balloon payment?

Refinancing lets you pay a large sum over a longer term. This means you do not have to pay the whole amount at once, and you can keep the car.

Pros

• You can keep the car you like and enjoy smoother cash-flow because you make smaller monthly payments.
• There are flexible payment schedule options.

Cons

• Make sure to look at the total finance amount and any settlement fee. These can affect what you pay, so check them well.
• Older cars may cost more to run when you start using them for the new term.

Illustrative refinance of £7,000 over 36 months:

Look at your options with a personal loan and quotes from the dealer—and compare car finance offers from many places before you agree to anything.

Part exchange vs hand back: which is smarter?

• If the value of the car is more than what you still owe and you want a new car, you can part exchange it. The positive equity helps lower your monthly payments for the next deal.
• If the car’s value is at or below the balloon payment and you do not want any more debt, you can just hand the car back with a PCP.
• Be sure to get at least two valuations and look over the APR and fees. A small change in interest rate can change the total cost.

Early settlement during the term

You can pay off your agreement early by paying the settlement figure given to you. This figure includes any rebate of future interest payments as set out in your contract. After you pay off the agreement, you can sell the car, trade it in for another, or keep it. This option could be good if car prices are high right now or if you can get lower interest rates on a new finance deal.

Voluntary termination (VT): your legal right (UK)

For many regulated PCP/HP agreements, voluntary termination is a choice you have under sections 99 to 100 of the Consumer Credit Act. This lets you end the agreement when you have paid half of the total amount payable. For PCP deals, the 50% usually includes the balloon payment as shown in your documents. If you have not paid the full 50%, you can still VT if you pay the missing amount. Voluntary termination means you must give the car back in good condition. You may be charged if there is more than fair wear on the car. Voluntary termination is not the same as voluntary surrender.

Fees and charges to expect

• Option to purchase / purchase fee (if you want to keep the car).
• Admin fees (for paperwork or closing out, if shown).
• Excess mileage and fair wear charges are there if you give back the car.
• Missing items (like a spare key, service book, or charging cable) can often come with set fees.

Beyond cars: where else do balloons appear?

• A balloon mortgage is a type of home loan. You pay smaller instalments for a short term, like 5 to 7 years. At the end of a balloon loan, you must make a large balloon payment. Many mortgage lenders set rules on these loans for homes people live in. Whether you can get one depends on rules in your area. If you are in the US, you can look at the Consumer Financial Protection Bureau guidance on Qualified Mortgage rules.
• A balloon payment is also common in commercial real estate. Many business owners use loans with a 20 to 25-year amortisation schedule and a 5 to 10-year balloon. At the end of a balloon loan, you should be ready for refinance risk.

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Practical checklist before you pick an option

1. Ask your finance company to give you a settlement figure. Make sure you check if there is a settlement fee.
2. Find out what your car is worth. You can get trade offers or quotes from places that buy cars.
3. See how your car’s condition matches up with normal wear. In some cases, small smart repairs can cost less than the charges at the end.
4. Look at what it would cost to refinance, pay in cash, or return your car or part-exchange it.
5. Look at different car finance quotes. This can be HP, PCP, or a personal loan. Pay attention to the interest rate, loan term, and any fees. These things can change the total cost much more than small price differences.

FAQs About Balloon Payment Car Finance

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