Car finance is a great tool for getting a modern, safe, and reliable car without the massive expense of buying it outright. However, as with any finance agreement, you should always be aware of all the terms and conditions, balloon payments in particular are one of the most important things to be aware of. 

In this blog, we’ll discuss balloon payments in-depth, including whether or not it makes sense to pay them and potential benefits. 

What is a Balloon Payment? 

Most commonly offered on PCP (personal contract purchase) finance deals, balloon payments are the last one-off payment that allows you to purchase and own the car. They are calculated at the start of the contract, based on the car's predicted value at the end of the finance term.  

Balloon payments are optional, and many choose to either allow the deal to end, exchange the car for a newer one, or take out a new PCP deal on the same car. 

What is Personal Contract Purchase? (PCP) 

To fully explain what a balloon payment is, it helps to fully understand PCP financing. Personal Contract Purchase is the most commonly used finance option in the UK. It allows the customer to drive a new or used car for a lower monthly payment than through HP (hire purchase) but without the upfront cost.  

PCP allows the purchasing of the vehicle at the end of the finance term, by paying the balloon payment, at which point the car ownership would pass to the customer.  

For more information about PCP vs HP, check out this guide. 

How are Balloon Payments Calculated? 

Balloon payments are an estimation of the car's value at the end of the finance term; different finance providers use different methods of calculating the balloon payment. 

Your monthly payments are then adjusted to accommodate this final value, including the interest you pay to borrow the money. 

Alternatives to Balloon Payments 

If you’re already in a PCP finance agreement you can choose to pay the balloon or not, if you don’t wish to pay the balloon many finance providers will offer another finance term for the same vehicle. Bare in mind that the rates for this may not be as competitive as with a new deal, as you are already locked in. 

If you haven’t yet taken out car finance, and would rather pay more per month instead of paying a balloon, consider HP (hire purchase) agreements instead. These have higher monthly payments, but you own the car - with no balloon - at the end of the term. 

Balloon Payment Example 

Before signing up to a finance agreement, make sure you are fully aware of the costs and payments required from you. The best way to check these is to read the documentation fully, but to help understand that documentation, the below example should help. 

Toyota Corolla 1.8 Icon 2021 

Car price: £13,899 

Initial deposit: £1,000 

Monthly payments: £214.03 

Term: 48 Months 

Balloon payment: £6,520.34 

In this example, the financier estimates the value of the car to be £6,520 at the end of the 48 month/4 year term, this means that the total paid in order to own the car is £17,580. To hand the car back the amount paid would be £11,060. 

Is it Worth Paying the Balloon Payment? 

If you like your car and have the cash to hand, it may be best to pay the balloon and own the car. However, If you don’t mind paying a monthly payment or want a newer car, handing the car back and finding a new finance deal is always an option.  

Still Don’t Know Whether to Pay the Balloon Payment? 

Paying the balloon can be a good or bad financial decision, regardless of your thoughts on the car itself. PCP deals can almost be described as a fixed-term lease, with the option to buy at the end, the caveat being that the final cost is estimated at the start of the finance term.  

If you are indifferent to the car, and purely want to make the best financial decision, look up your vehicle on something like Autotrader for a comparable price. If your balloon is significantly more than comparable values, it’s probably not worth paying.  

Conversely, if your balloon is lower than market value, as may be the case if your PCP deal started before the current spike in the used car market, buying may make more financial sense. 

Can you decrease your Balloon Payment? 

Unfortunately, you cannot change the balloon payment once it has been agreed between you and the finance company. Even upping your monthly payments cannot decrease the final value settlement, as the car value will still be the same.  

If you are thinking of taking out a finance agreement, increasing the mileage limit can decrease the balloon payment, as the car will theoretically be worth less if it has more miles on it. This only makes sense if you intend to do those miles, as your monthly payments will increase slightly. 

Benefits and Drawbacks of a Balloon Payment 

Compared to finance methods that do not feature a balloon payment, such as HP or leasing, balloon payments offer some distinct advantages: 

• Monthly payments are lower 
• It allows you to hand back the car if you want to upgrade 
• No need to sell the car at the end of the term 
• Option to refinance if you want to own the car but can't afford the balloon 

These benefits are possible with leasing or HP, but they cost more per month for the entire finance term.  

Disadvantages of a Balloon Payment 

Depending on your circumstances, another kind of finance method may be better, these are a few of the downsides to balloon payments: 

• It's a large amount of money to pay at once 
• If you can’t afford the balloon, you have no other way to own the car without being tied into a new finance deal 
• Other finance methods spread out the total cost over a longer period 
• You must stick to the mileage limits and repair any damage if handing the car back 

Balloon Payments Vs Other Types of Financing 

As we’ve mentioned PCP (personal contract purchase) is the only type of finance arrangement that typically includes a balloon payment. Depending on your intentions there are other financing options that may suit you better.  

HP - Hire Purchase 

Hire purchase agreements can be considered similar to buy now pay later credit schemes, whereby you pay off the total amount for the car - plus interest - in monthly instalments over a period of time.  

The monthly payments are typically higher on hire purchase deals, as there is no balloon, but it can make managing your finances easier in the long run.  

HP is perfect for those looking to buy a car and own it past the end of the finance period, if you can make the monthly payments you will own the car at the end of the term.  

Leasing - Contract Hire 

Leasing a car is the same as renting a car, just over a longer predefined period of time, these can often range from 2 to 6 years. With leasing you will never - and usually don't have the opportunity to - own the car. There is no balloon payment with car leasing. 

The monthly payments on a lease are typically of a similar cost to PCP, but leasing is generally only offered on new cars, so if you’re considering a vehicle a few years old, leasing is likely to be the most expensive option.  

If you do not intend to own the car, and want a brand new one, leasing can be a more straightforward process over PCP, and often works out cheaper. As with PCP there are strict guidelines on vehicle damage, servicing and mileage limits, though. 

Personal financing - Bank loan or Credit card 

In addition to the financing options given by a dealer or seller, there are some options to help cover the costs of buying a vehicle. The most popular of these options is a personal loan. Many banks and credit unions offer unsecured financing for buying cars.  

The interest rate on a personal loan is often better than on PCP or contract hire, but you will have to make sure you can afford the payments, as the interest rates on late payments can be substantially higher. 

One potentially interest-free option is a credit card. Quite a few card providers offer zero-interest credit cards for a set period, often up to 20 months. You will need a reasonable credit score to qualify, and find a car dealership that accepts credit cards.  

How to Prepare for a Balloon Payment 

If you are worried about your end of finance fee, but you have only recently entered your finance period, there are a few things you could do to alleviate the stress. 

Calculate how much your car will be worth at the end of the deal, and if the balloon is worth paying. Even if you can afford the final payment, it may not be the best option to take, especially if the car is worth less than the balloon amount.  

If you can, put money aside for the balloon payment in advance, some banks offer regular saver accounts that give better interest rates on regular saving, meaning your savings will grow faster than in a regular current account. 

What To Do If You Can't Afford The Balloon Payment 

If you are approaching the end of your PCP finance deal, you will have the choice to pay the balloon or not, if you cannot afford the balloon payment you can hand the car back to the finance company.  

Another option is to take out a further finance deal on the same car, many finance providers will allow this, either as a PCP deal again or a HP agreement. This can let you keep your car without having to pay the large balloon payment. 

Be aware that handing the car back will result in it being inspected for damage, and the odometer checked, as almost all PCP deals have a limit on mileage per year. 

Balloon Payment Summary 

Balloon payments are usually included in PCP finance deals, and are calculated based on the value of the car at the end of the finance term. If paid you will then own the car, but returning the car without paying is also an option.  

To know whether to pay a balloon payment or not you should look at comparable prices on the used car market for your cars make and model. Also take into account how much you like the car, its reliability over the term and what you would replace it with.  

Regardless of whether your car is financed or owned, it makes sense to spread the cost of car repairs with zero-interest financing from Bumper. Search for your nearest approved partner now. 

Author - Joseph Law

Joseph has been writing about cars for over seven years and writing for Bumper for over two, blending his passion for automobiles with a talent for storytelling.

Joseph has written about engineering and cars for Autozilla, Komaspec, and several engineering manufacturers. When he's not writing or tinkering with one of his five cars, Joseph dreams of owning an Alfa Romeo 33 Stradale.