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Understanding Balloon Payments in Car Finance: What to Know

On the surface, a balloon payment sounds like something fun. Sadly, it has nothing to do with paying to float above the clouds in a wicker basket, or the cost of the brightly-coloured inflatables found at a party.

What's a Balloon Payment?

In simple terms, a balloon payment is a one-off lump sum that comes at the end of a loan period. But it is also a larger payment than all the ones that went before: hence ‘balloon.’

When it comes to cars, balloon payments often occur as part of a PCP, or Personal Contract Purchase agreement. You pay a fixed monthly amount, including interest, over a set period of time, usually between two and five years.

The amount remaining at the end is calculated at the start of the loan term, based on the likely value of the car at the end of that time. The instalments you pay in the meantime make up the difference.

How Does it Work in a Real Life Example?

If your car is worth £10,000 at the point of sale, and your balloon payment is agreed at £4000, you’ll have £6000 plus interest to pay in between. Over five years, this would work out at £100 per month, not including interest.

If you want to own that car at the end of the loan, you would then need to pay that £4000 in full.

Are Balloon Payments Good or Bad? 

This is the biggest pitfall of balloon payments: you need to make sure you’ve got the money to pay it off when the loan period ends. You might have only been paying £100 (plus interest) per month, but that £4000 still needs to be paid in full.

If you don’t have that amount available, you might be able to spread the balloon payment out over another set of instalments. This is known as refinancing. However, doing so would prolong the overall loan period, leading to a longer cycle of debt. Not ideal, especially if you want to own the car outright.

Extending the loan period by refinancing the balloon payment could also lead to more interest being charged during the extended loan period. So, again, you’ll be paying more in total.

PCP agreements tend to come with high interest rates anyway, so you could end up paying a lot more if you refinance the balloon payment. And, on top of all that, it may not even be possible to have the balloon payment refinanced.

Your car may also not be worth as much as the balloon payment itself by the time the payment comes due. So, even if you can pay it all off, you could end up paying more for the car than it is worth.

Alternatively, should you default on the balloon payment, you may be required to sell the car in order to repay it. But, if your car is worth less than that final amount, you would end up still in debt and without a car.

What is Car Subscription?

Wagonex knew that running a car should be easier than this. So, we’ve got a simpler way for you, it’s called a Car Subscription. Everything you need comes in one monthly payment. The only costs not included are fuel, insurance and a small, refundable deposit.

This means you might be paying more in total each month than on a PCP, but when you subscribe to a car you get road tax,  and breakdown cover included, and you won't have to fork out a lump sum to repair your car, or have it serviced. because those costs are already included. 

What could be simpler? We think balloon payments and PCPs ultimately makes life harder than it needs to be.

Just select the car you want, and decide the terms that are right for you. Then just wait a short while, and you'll be on the road with your new car. 

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