Balloon Payment: Car Finance Jargon Busters
You might have seen car finance deals which mention balloon payments, but you're not quite sure what a balloon payment is. 🤔 You will typically come across this common car finance jargon, if you're looking into a Personal Contract Purchase deal, commonly referred to as PCP.
If you want to own the car at the end of the finance term, that's where the balloon payment comes into play. If you prefer lower monthly payments and the flexibility of having several options on what to do with the car at the end of your car finance contract, then a PCP agreement might be an excellent choice.
Still confused? Discover everything you need to know about balloon payments in this helpful blog.
How PCP Car Finance Works
Most balloon payment car finance deals are PCPs, but you can also sometimes find HP deals that offer this option. Among car finance deals and car loans, PCP car finance has lower monthly repayments.
You can finance a new or used car through a PCP deal, which means you can spread the cost of the vehicle over a specific number of months and then pay an optional final payment at the end of your contract if you want to keep the car. If you don't want to pay the balloon payment, you can return the vehicle to the car finance company.
The balloon payment of PCP deals allows car buyers to enjoy more affordable monthly payments. The way that PCP works is that the monthly amount only covers the difference between the initial price of the vehicle and its expected value by the time your contract ends. This differs from Hire Purchase car finance deals which require you to pay the total cost of the vehicle. You can learn more about the differences in our blog, PCP vs HP car finance.
when you've reached the end of your car finance contract and have paid the last instalment, the car is yours to own, keep, modify, or sell. You sometimes have to pay a Transfer Fee to transfer ownership to you, but this might only be £1, which is the amount we currently charge here at Carmoola.
You can calculate hire purchase balloon payment options before applying to get an idea of how much it will be.
Benefits of Having an Optional Balloon Payment
If you're the type of driver who wants to change cars every few years, then it would be more suitable for you to get a PCP deal rather than a Hire Purchase agreement. A PCP deal will make it easier to change cars once you have completed your contract. With lower monthly payments, PCP car finance is also more affordable. You can return the vehicle after the specific term and then finance another car you want to drive.
Since PCP deals also offer car buyers the option to own the car rather than return it, you must understand how a balloon payment works. You might want to consider saving up enough money ahead of time so that if you wish, you can pay the balloon payment if you're going to own the vehicle.
How Balloon Payments Work
Balloon payments are also known as "optional final payments" in PCP car finance agreements. The amount you have to pay for the balloon payment significantly affects how much you need to pay for the car every month. When the amount for the balloon payment is higher, then that means you can expect lower monthly payments. You just have to be prepared to pay a more expensive final payment if you want to own the car. A typical balloon payment amount equals just over two months of loan repayments.
Make sure you use a car finance with a balloon payment calculator before taking out a PCP agreement. At Carmoola, we have a great car finance calculator you can utilise to get an idea of how much you will need to pay.
What if I Don't Want to Buy the Car?
Remember that the balloon payment in a PCP deal is an optional final payment if you want the car to be yours. If you don't want to keep the vehicle, you can return it to the car finance company and not pay anything else. Of course, you must ensure the car is still in good condition and hasn't exceeded the mileage limit. Learn more about annual mileage car finance jargon.
If you want to own the car, know that the final payment is fixed at the start of your contract with the car finance company. If you've already decided early on to keep a financed car, you might want to consider getting a Hire Purchase car finance deal instead. This way, even if the monthly payments are higher, you won't have to worry about preparing enough cash to afford the balloon payment at the end of your contract.
Explore the benefits of finance vs cash for car purchases in our useful guide.
How is a Balloon Payment Calculated?
The optional balloon payments car finance amount depends on the estimated future value of the car. At the beginning of your PCP deal, the car finance company estimates the car's value by the time your contract ends. Once the amount for the balloon payment has been set, the next thing to calculate is the amount you have to pay the lender every month.
The car finance company calculates the difference between the car's value at the beginning and end of the contract, the balloon payment, and your deposit, along with interest for financing a vehicle. Simply put, the payments you have to make monthly, and your deposit cover the value that the car is expected to lose throughout your contract term. It doesn't cover the car's full cost the way a Hire Purchase agreement does.
That’s a wrap!
What if you didn't want to own the car but changed your mind later on? That's alright because a PCP car finance deal allows you to choose what you want to do with the vehicle at the end of your contract.
However, before you pay the balloon payment, you might want to consider getting the vehicle valued first. If the car is already worth less than the amount you must pay as a final payment, it's better to return the car.
Consider buying a similar car for sale on the used car market because it would be more affordable, and you'll get more value for money. If you're looking to finance a second-hand car, Carmoola is here to help! Check out how this new and convenient way of financing a car works now! We handle the entire process online, and carry out a soft search that won’t harm your credit score before you apply 😀
You can also familiarise yourself with other complicated terms you might come across in our in-depth car finance jargon explained blog.