Balloon payments explained

Last updated 3 November 2026 · Reviewed by 360 Asset Finance Compliance

What is a balloon payment?

A balloon is part of the amount you borrow that you agree to repay as one final payment, rather than spreading it across your regular repayments. It's agreed at the start, written into your contract and due when the term ends. Balloons are common on car loans and on business vehicle and equipment finance. Whether one is available, and how large it can be, depends on the lender, the asset and the loan.

What's the difference between a balloon and a residual?

They work in a similar way. "Balloon" is usually used for loans, such as a car loan, a chattel mortgage or commercial hire purchase. "Residual" is usually used for leases, such as a finance lease or a novated lease, where the residual is generally set at the start. In both cases there's an amount left to pay, or deal with, at the end of the term.

How does a balloon lower my repayments?

Without a balloon, each repayment pays off some of the amount borrowed, so the balance reaches zero by the end of the term. With a balloon, your repayments only need to pay off the part of the loan that isn't left until the end. Each regular repayment is therefore smaller. This can free up cash flow, which is why some people and businesses choose one.

Why does a balloon increase the total cost?

Because the balloon amount isn't paid down during the term, you pay interest on it for the whole term. Your balance also stays higher for longer, so more interest builds up overall. The result is lower regular repayments but a higher total cost than the same loan without a balloon. When you compare options, look at the total amount you'll repay, including the balloon, not just the regular repayment.

What are my options at the end of the term?

When the balloon or residual falls due, the general options are to:

• Pay it in full from savings or other funds, and the asset is yours outright.
• Refinance it with a new loan. This isn't automatic: it depends on your circumstances and the lender's assessment at the time.
• Sell or trade in the asset and use the proceeds to pay the balloon. If the asset is worth less than the balloon, you'll need to make up the difference.

On a lease, the options depend on the agreement and may include paying the residual and taking over the asset, refinancing it or trading it in. Check your contract well before the term ends.

What should I think about before choosing a balloon?

• How you'll pay the balloon when it falls due, and whether you'd have the funds if refinancing wasn't available.
• How long you plan to keep the car or asset.
• What the asset might be worth at the end. Don't assume it will be worth the balloon amount, especially if it's heavily used or high-kilometre.
• Whether the lower regular repayments are worth the higher total cost.

For a car loan for personal use, responsible lending applies: the loan must suit your needs and you must be able to afford the repayments. That includes thinking about the balloon, so your broker will ask how you plan to pay it.

How do balloons work on business vehicles?

Businesses often use a balloon on a chattel mortgage or commercial hire purchase to keep regular repayments in line with cash flow. The same trade-off applies: lower repayments now, a lump sum at the end and a higher total cost. A business that replaces its vehicles regularly may plan to sell or trade in each one to cover the balloon. Ask your accountant how a balloon affects GST, depreciation and tax for your business.

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General information only. It doesn't take into account your objectives, financial situation or needs, and it isn't credit, tax or legal advice. Finance is provided by the lender you choose and is subject to its lending criteria; fees and charges apply. 360 Asset Finance is a trading name of Kuone Consulting Pty Ltd (ABN 75 647 329 002), Australian Credit Licence 566705.