Calculate balloon payments on loans and mortgages. Find the large final lump sum payment and compare with standard repayment to choose the best option.
A balloon payment is a large lump-sum payment due at the end of a loan term, after a series of smaller regular payments. Because you're not repaying all of the principal each month, monthly payments are lower — but you must pay the remaining balance (the 'balloon') at the end, either in cash, by refinancing, or by selling the asset. Common in car finance (PCP), commercial mortgages, and some personal loans.
A balloon payment reduces monthly instalments significantly because you are only repaying a portion of the loan during the term. For example, a £20,000 loan at 6.9% over 60 months might have standard payments of £395/month, but with a 30% balloon (£6,000), monthly payments drop to around £305/month — saving £90/month but leaving a £6,000 payment at the end.
If you cannot pay the balloon payment at maturity, your options are: (1) refinance — take a new loan to cover the balloon amount; (2) sell the asset (e.g., the car) to cover the payment; (3) negotiate with the lender to extend the term or restructure. Failing to pay will result in default, which damages your credit score and may lead to repossession.
PCP (Personal Contract Purchase) is a type of car finance that features a Guaranteed Future Value (GFV) — similar to a balloon payment — as the final optional payment. With PCP you have three choices at the end: pay the GFV and own the car, return the car (with no balloon to pay), or part-exchange it. This flexibility makes PCP popular for car finance.
Yes — balloon payment loans typically cost more in total interest than standard repayment loans. Because the outstanding principal reduces more slowly (a portion is deferred to the end), you pay interest on a higher average balance throughout the term. The benefit is lower monthly payments during the term; the cost is higher total interest and a large lump sum due at maturity.