Are you thinking about a new set of wheels but unsure of the best way to finance it? There may be multiple options available to you, but you should do your research to make sure it matches up with your long term motoring plans.
Car finance with an optional end of agreement balloon payment is just one option for financing your next car purchase.
How balloon payments work
A balloon payment is a sum of money owed to the lender at the end of a finance agreement. Also known as optional final payment.
finance with a balloon payment option usually results in lower monthly repayments, as you’re postponing part of the cost of the vehicle to the end of the contract.
With car finance that has a balloon payment at the end of the deal, there are two loan options. The first one is a Personal Contract Purchase (PCP) and the other is a Lease purchase.
The final balloon payment is typically calculated by working out the difference between the purchase price less deposit and monthly payments you make towards the vehicle and its estimated future value.
See below example of PCP final balloon payment calculation:
- You purchase a car via PCP finance that costs £35,000.
- The finance term is 36 months.
- The car is expected to be worth £19,000 at the end of the PCP agreement.
- This means you pay finance on £16,000 depreciation value.
- At the end of the agreement, you will have an optional balloon payment of £ 19,000 at the end of the agreement.
Why are balloon payments valuable for borrowers?
By using a finance product that includes a balloon payment it means you can get a vehicle with lower monthly payments compared with other finance options as Hire Purchase car finance.
Having lower monthly payments means you could afford to drive a more expensive car than you might otherwise be able to afford.
Balloon payment finance options provide you with flexibility. At the end of the agreement, you have multiple options, which include:
- 1) To keep the car and pay the balloon payment or
- 2) Hand the car back in case you don’t want to pay the balloon payment
Disadvantages of balloon payments
The risk of negative equity is something you should consider when looking to take out a PCP finance deal. If you want to hand the car back early, then you will need to make sure the payments you have made will cover the current value of the vehicle. If not, then you would be liable to pay the difference and there may be early termination fees you will have to pay to exit the agreement early.
At the start of the agreement, you will be required to confirm your mileage limit. If you exceed this mileage limit, then you will be liable for the cost of excess miles.
You will not own the vehicle until you have reached the end of the agreement and have paid the balloon payment. This means you are not able to sell the vehicle.
In order to own the vehicle outright at the end of your agreement you will need to pay the balloon payment. This means you will need to come up with the cash to cover this.
How do you get out of a balloon payment?
There are a couple of options here when it comes to end of your agreement and not wanting to pay the balloon payment.
You can refinance the balloon payment by obtaining another loan to spread the cost of the balloon payment.
You can hand the car back at the end of the agreement. You will not have any outstanding liability, so no further money is due to the car finance company.
How to decide if a balloon payment is right for you
A PCP finance agreement allows you flexibility in your long-term motoring plans by giving you multiple options at the end of your agreement.
You do need to remember you do not own the vehicle and therefore cannot sell it. If you are experiencing a change of circumstances whereby you need to change vehicle or get rid of it completely.
It also allows you to have a new or nearly new vehicle meaning it is less likely you will be forking out on expensive car repairs and may provide you with peace of mind if you tend to use your car a lot.
A PCP finance agreement is more suited to people who want to change their vehicle every 2-4 years and want to drive something that is either brand new or nearly new.
If you would prefer to pay for a car monthly for the term length then would like to own it and not have any further payments, then PCP is probably not the right option and a Hire Purchase agreement is probably more suited to your long-term plan for motoring. For further information, read our blog post on car finance option comparisons.
Go Car Credit finance and balloon payments
Here at Go Car Credit, we offer Hire Purchase finance to our customers. Our finance agreements do not have a balloon payment at the end of the term. With our finance, you spread the cost of the entire vehicle across the loan term. This means during the term you will have fixed monthly payments and at the end of the agreement you will own the vehicle outright.
We do offer our customers the ability to take out a new car finance agreement if they wish to change their vehicle and they could benefit from a lower interest rate, higher lend and longer term to spread the cost.