How a balloon works
Moneysmart describes it in two steps: part of the loan is paid off in the regular repayments, and a final lump sum, the balloon, is paid at the end of the loan. It lists balloon payments among the costs to check in a loan’s terms and conditions, beside establishment fees and early repayment fees.
ASIC’s 2026 review of car lending found that most of the lenders it looked at offered balloon features, each with a sliding scale for how large a balloon it would allow. As a rule, a shorter loan term and a newer car meant a larger balloon was allowed. Some lenders also offered ways to meet the balloon when it fell due, such as selling the car or refinancing the balloon.
An illustration, worked three ways
The figures below are an illustration with round numbers, not a market rate or anyone’s loan. They assume $40,000 borrowed at 8% a year over five years, sixty equal monthly repayments with interest worked out monthly at one twelfth of the yearly rate, no fees, and the balloon paid together with the last repayment. Totals are worked from unrounded repayments and rounded to the dollar.
| Loan | Monthly repayment | Balloon at the end | Total repaid | Of which interest |
|---|---|---|---|---|
| No balloon | $811.06 | $0 | $48,663 | $8,663 |
| $10,000 balloon (25%) | $674.96 | $10,000 | $50,498 | $10,498 |
| $16,000 balloon (40%) | $593.30 | $16,000 | $51,598 | $11,598 |
- Extra interest, $10,000 balloon$1,834more than with no balloon
- Extra interest, $16,000 balloon$2,935more than with no balloon
Why the total rises
Read down the table and the monthly repayment falls by about a quarter between the first row and the last, while the interest rises by about a third. In this illustration that is because the balloon is never paid down along the way: the whole amount stays owing for all five years, so interest runs on it every month until the last. That matches Moneysmart’s general point that the lump sum is repaid with interest.
The same pattern shows up in Moneysmart’s advice on personal loans: shorter terms can mean less interest overall, while longer terms may lower the repayments but increase the total cost. A balloon lowers the repayment in a similar way, by leaving part of the debt for later.
When the balloon falls due
Moneysmart’s caution
Before choosing a balloon, Moneysmart’s advice is to be sure the money to pay it will be there on the day it falls due.
The options ASIC saw lenders offer for that day included selling the car or refinancing the balloon. Each has its own catch in the sources:
- Selling the car. Moneysmart notes that if a car has to be sold to meet a loan debt, the price it brings might not cover the full debt, leaving the rest still to pay. ASIC found that the purchase price of a financed car was often significantly higher than the lender’s verified “book value”, which raises that risk.
- Refinancing. A refinanced balloon is borrowing again: a new loan to compare on its own rate, fees and term, as Moneysmart describes for any personal loan.
Guaranteed future value: a balloon with a promise
A guaranteed future value feature lets the car be returned for a guaranteed value at the end of the loan term, with a choice to upgrade, keep or return it. Moneysmart says conditions apply to realise the full trade-in value, for example a limit on kilometres and a car returned in good condition, not beyond fair wear and tear. In ASIC’s review these loans had terms of 12 to 48 months. In this guide’s reading, the guaranteed value only helps if the car is handed back on those conditions. In one case study, ASIC describes the guaranteed future value loans it examined as carrying mandatory balloon payments.
A novated lease has its own version of the lump sum, called the residual, set under ATO rules. The novated leases guide covers it.
Questions the sources raise
- How large is the balloon, and when exactly is it due? Moneysmart’s caution is about having the money ready then.
- What is the total cost of the loan with the balloon, not only the repayment? Moneysmart points to its personal loan calculator to compare how different loans affect the total cost.
- If the plan is to sell the car, could the sale price fall short of what is owed?
- For a guaranteed future value loan, what are the kilometre and condition terms?