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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? 🤔 It’s typical to encounter this car finance jargon and you will come across this term if you’re looking to get a Personal Contract Purchase deal. 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 a good choice to consider. If you want to own the car at the end of the finance term, then that’s where the balloon payment comes into play. Let’s learn more about this particular car finance jargon!

How PCP Car Finance Works

Among car finance deals and car loans, PCP car finance is the option that usually 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 simply 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 amount you pay every month only covers the difference between the initial price of the vehicle and its expected value by the time your contract ends rather than paying the full price, which is not the case with Hire Purchase car finance deals. 

With HP car finance, your deposit and the payments you have to make every month will cover the full cost of the vehicle. That’s why 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, sell, or anything you like. You sometimes just have to pay a Transfer Fee to transfer ownership to you, but this might only be £1, the amount we charge here at Carmoola.

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. It’s because a PCP deal will make it easier for you to change cars once you're done with your contract. With lower monthly payments, PCP car finance is also more affordable, and you can simply 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, it’s important that you understand how a balloon payment works. You might want to think about saving up enough money ahead of time, so that if you wish, you can pay the balloon payment if you finally want 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 has a significant effect on 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 decide you want to own the car. Make sure you use a car finance with balloon payment calculator before taking out a PCP agreement so you’ll have an idea about the cost of financing a car.

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 car, you can simply return it to the car finance company and not pay anything else. Of course, you have to make sure that the vehicle is still in good condition and hasn’t exceeded the mileage limit

If you do 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 that you want to keep a financed car, then do 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. 

How is a Balloon Payment Calculated?

At the beginning of your PCP deal, the car finance company estimates the car’s value by the time your contract ends. The optional balloon payment depends on the estimated future value of the car. Once the amount for the balloon payment has been set, the next thing to be calculated would be 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 the interest for financing a car. To put it simply, the payments you have to make every month, as well as your deposit, cover the value that the vehicle is expected to lose throughout your contract term. It doesn’t cover the full cost of the car the way that a Hire Purchase agreement does. 

Takeaway

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 gives you the flexibility to choose what you want to do with the car 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 have to pay as a final payment, then it’s better to return the vehicle. 

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 your money. If you’re looking to finance a secondhand car, Carmoola is here to help! Check out how this new and convenient way of financing a car works! 😀

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