Balloon financing means reducing your monthly car payments now, but making a large “balloon payment” at the very end of the loan. After that, you can break out the balloons and celebrate.
Using a balloon payment for your car has some advantages, but not all vehicles qualify, and that final payment can be rough.
Leasing a car can seem appealing with its lower monthly payments compared to financing a vehicle purchase. But before signing on the dotted line, it’s important to understand how leases work, including what a balloon payment is.
A balloon payment is a large final payment due at the end of a car lease. It can be tens of thousands of dollars depending on the vehicle leased. While balloon payments help reduce your monthly lease costs they also come with risks that you need to factor in.
Read on for a comprehensive guide on balloon payments including
- How a balloon payment lease works
- Pros and cons of balloon leases
- Strategies for making the balloon payment
- Alternatives to consider
- Answers to frequently asked questions
What is a Balloon Payment?
When you lease a car the way most people do, your monthly payments cover the loss in value of the car over the lease term plus interest and other fees. You just return the car at the end of the lease.
A balloon payment lease works differently. Your monthly payments only cover a portion of the car’s depreciation. The remaining depreciation gets rolled into a large balloon payment due when the lease ends.
If a car loses $15,000 in value over the course of a 3-year lease, for example, you would pay that $15,000 over 36 monthly payments of about $417 each.
With a balloon payment lease, you might pay only $250 a month over those 3 years, covering just $9,000 of the depreciation. The remaining $6,000 would be the balloon payment.
Balloon payments often range from $3,000 to $15,000 depending on the vehicle. Leases on luxury or specialty vehicles can have balloon payments exceeding $20,000.
How a Balloon Payment Lease Works
Here are the key details on how balloon payment leases work:
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Lower monthly payments: By deferring a portion of the depreciation to the balloon payment, your monthly lease costs go down. This is the main appeal of these leases.
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Higher residual value: Because the vehicle loses less value during the lease term, its predetermined residual value at the end of the lease is higher. This higher residual value translates to lower monthly payments.
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Large final payment: The balloon payment is not a purchase option. Even if you want to buy the car after the lease, you’d have to pay the residual value plus the balloon. Returning the car requires paying just the balloon payment.
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Like a regular lease: Aside from the balloon payment, it works like a normal lease with restrictions on mileage and wear. You don’t own the car during the lease term.
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If the balloon payment is made on time, just like any other auto lease payment, it can help build credit.
Pros and Cons of Balloon Payment Leases
Below are some key advantages and disadvantages to weigh when considering a balloon payment lease:
Pros
- Lower monthly payments free up cash flow
- Provides flexibility at lease-end to buy, lease again, or return
- Can obtain a pricier car for less monthly outlay
- Builds credit by making timely payments
Cons
- Large balloon payment due at end
- Risk of owing more than car’s value (upside down)
- Requires good budgeting to save for balloon payment
- Overall higher cost than conventional lease
As you can see, the lower monthly payments come with the trade-off of a big payment looming when the lease ends. It’s critical that you budget and prepare for that balloon payment.
Strategies for Making the Balloon Payment
Here are some strategies to ensure you can make the balloon payment when your lease ends:
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Start saving immediately – Open a separate savings account and automatically deposit funds monthly.
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Invest lump-sum payments – Investing a tax refund or other funds can generate returns to put toward the balloon payment.
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Pay extra each month – Increasing your monthly payment even slightly can make a dent in the balloon payment.
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Refinance or take out a loan – If you have equity, you may be able to refinance the lease and fold the balloon payment into the new loan.
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Buy an extended warranty – Some warranties cover balloon payments if you can’t pay. Read the fine print carefully.
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Plan to buy or lease again – Work on maintaining good credit so you’re able to roll into a new purchase or lease.
No matter what, start planning for that balloon payment as soon as you sign the lease to avoid any unwelcome surprises down the road.
Alternatives to Balloon Payment Leases
If you’re worried about affording a large balloon payment, here are a few alternatives to consider instead:
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Conventional lease – Higher monthly payments but no balloon payment to stress over.
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Longer lease term – Extending the lease spreads depreciation over more months for possibly lower payments.
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Used vehicle lease – Leasing a used vehicle often comes with lower payments overall.
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Buy instead of lease – If you can qualify for low financing rates, buying may cost less per month than leasing.
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Lower-priced car – Opting for a less expensive vehicle can significantly reduce your monthly outlay.
Balloon payment leases let you drive a nicer new car for less each month, but make sure to run the numbers carefully and weigh all options before signing up for that big payment down the road.
Frequently Asked Questions
Here are answers to some common questions on balloon payment car leases:
What happens if I can’t make the balloon payment?
Unfortunately, you’d have to return the car and likely pay hefty wear and tear or mileage overage charges. It will also hurt your credit.
Can I refinance my balloon payment lease?
Possibly, as long as you have strong credit and positive equity in the vehicle. But refinancing a lease is often complex.
Do I have to purchase the car after making the balloon payment?
No, you can return the car after making the final payment if you don’t want to buy it. The balloon payment just allows you to complete the lease terms.
Are balloon payment leases good for bad credit?
Usually not, as poor credit makes it hard to qualify and risky that you’ll miss payments or the final balloon payment.
How much money do I put down on a balloon payment lease?
Like normal leases, you can put down however much you want upfront to lower your monthly payment. Putting more down reduces the amount financed.
The Bottom Line
Balloon payment leases allow you to drive a new vehicle with lower monthly costs compared to conventional leases or financing. But that large final payment presents a major risk if you fail to prepare and budget for it.
Carefully assess your financial situation and know what you’re getting into before signing a balloon payment lease agreement. For many consumers, a standard purchase or lease without a balloon payment will be the smarter choice financially. But if you enter into a balloon lease with eyes wide open, it can be manageable if properly planned for.
How does balloon financing work?
While a balloon loan may offer lower monthly payments, it’s important to consider the potential risks.
In a traditional auto loan, the debt is evenly divided across the whole loan term. Each month’s payment is the same.
In a balloon loan, on the other hand, the monthly payments are lower, but the big payment at the end (the “balloon”) for the rest of the loan is
Balloon loans are usually available for terms of 24 to 72 months. They will also usually have a higher interest rate than traditional auto financing.
You will need to have good credit to get this loan, just like with a regular car loan or lease. You can check your credit score for free at LendingTree Spring. You may also have to make a down payment.
You can shop around for the best auto loan rates. But remember that while your monthly payments may be lower (except for the final one), balloon financing can end up being more expensive overall. Consider the example below:
| 36-month balloon loan | 60-month traditional loan | |
|---|---|---|
| Vehicle sale price | $42,950 | $42,950 |
| Down payment | $4,295 | $4,295 |
| Amount financed | $38,655 | $38,655 |
| APR | 6.00% | 5.00% |
| Number of payments | 35, plus final balloon payment | 60 |
| Monthly payments | $556.81 | $729.47 |
| Balloon payment | $24,911 | None |
| Total paid | $44,399 | $43,768 |
Summary: The traditional loan here would cost $631 less.
Balloon financing vs. leasing
While balloon financing seems similar to leasing, there are some differences you should be aware of.
Like a closed-end lease, monthly payments are usually lower because you’re not paying for the entire value of the car during the financing term. But unlike a typical closed-end lease, you can’t walk away from the vehicle when the balloon payment is due — you must make the final balloon payment.
With balloon financing, you own the car, just like with traditional financing. You don’t have to worry about mileage or condition limits like you do with a lease. You can sell or trade in the car to make the last payment.
Some car manufacturers’ finance companies, such as Ford Credit, allow you to turn the car in or trade it in on a new vehicle without paying the principal balance on a loan with a balloon payment.
Hyundai Motor Finance offers balloon loans with the final payment based on the vehicle’s estimated residual value at the end of the term. A deal like this is similar to a lease: It includes mileage caps and excessive wear and tear fees, so that the balloon payment here resembles a lease buyout.