Financing a Car: What Is a Balloon Payment?

When financing a car, there are a few options that you can choose from to do it. One of the popular options is a balloon payment because it provides buyers with more flexibility compared to buying a new or second-hand car once off.

What is a balloon payment?

A balloon payment is a car financing option that allows you to finance a car over months or years depending on the agreement with the dealer. It is called a “balloon” payment because there is a large payment that you make at the end of your loan term after paying a set monthly payment. 

Pros vs. Cons of Financing a Car with a Balloon Payment

If you’re considering using a balloon payment to finance a car, you should weigh the pros and cons to see if it suits your needs.

Pros:

The benefit of this method is lower monthly payments because a large part of the loan is paid off at the end. This means that you have flexibility to plan your finances to handle future expenses and that you can enjoy a higher-end car that you would otherwise not have the finances to purchase once off.

Cons:

One of the downsides is the increased interest costs. Yes, your monthly payments will be lower but the total interest paid across the loan may be more than that of a traditional loan. There is also the risk of refinancing happening if you cannot afford the balloon payment at the end of your loan but this can be avoided with careful financial planning.