What is a balloon payment on a car loan and how does it work in Australia?

A balloon payment is a lump sum payment made at the end of a car loan term that is larger than the regular loan repayment amount. In Australia, balloon payments are a popular option for car buyers who want to lower their regular repayments and have flexibility at the end of their loan term.

When taking out a car loan in Australia, borrowers can choose to make a balloon payment at the end of the loan term, which will reduce the amount of their regular repayments throughout the term. This can be an attractive option for those who want to free up cash flow for other expenses or who plan to trade-in or sell their car at the end of the loan term.

For example, let’s say you take out a car loan of $20,000 with a term of five years and an interest rate of 5%. If you decide to make a balloon payment of $5,000 at the end of the loan term, your regular repayments will be lower because you are not paying off the entire loan amount over the term. This means you’ll have lower monthly payments, but you will need to make the lump sum payment at the end of the term.

At the end of the loan term, you have three options. Firstly, you can make the balloon payment and own the car outright. Secondly, you can refinance the remaining balloon payment and continue to make repayments over a new loan term. Lastly, you can trade-in or sell the car and use the proceeds to pay off the balloon payment.

While balloon payments can be an attractive option for some car buyers, it’s important to understand the risks and costs involved. Balloon payments can increase the total cost of the car loan as interest is charged on the full loan amount, including the balloon payment. Additionally, if you are unable to make the balloon payment at the end of the term, you may be required to refinance or sell the car to cover the cost.

In Australia, the Australian Securities and Investments Commission (ASIC) regulates balloon payments on car loans. ASIC requires lenders to disclose the full cost of the loan, including any balloon payment, in the loan contract and to provide clear information on the borrower’s obligations at the end of the loan term.

In conclusion, a balloon payment is a lump sum payment made at the end of a car loan term that can lower regular repayments and provide flexibility at the end of the term. However, it’s important to consider the costs and risks involved before deciding if a balloon payment is the right option for your car loan.

What is a balloon payment on a car loan and how does it work in Australia? Speak to a qualified broker today!