A balloon payment, also known as a residual payment, is a lump sum you can pay at the end of your car loan term. Adding a balloon payment helps you reduce your ongoing car loan instalments, but it also impacts the overall cost of your loan. Although these are mandatory on novated leases and commercial finance leases, they’re optional on car loans.

How do car loan balloon payments work?

A car loan with a balloon payment works differently from a traditional car loan. Instead of repaying the full loan amount through equal monthly instalments, the loan is split into two parts:

Regular monthly repayments, which are lower than usual
A final lump sum, known as the balloon payment, due at the end of the term

For example, if you’re buying a $20,000 car over four years at 9% interest:

Without a balloon, your monthly repayments would be around $498, reducing your loan balance to $0 by the end of the term.
With a 25% balloon, your monthly repayments would drop to $411 – but you’d still need to pay $5,000 at the end to finalise the loan.

This structure allows borrowers to reduce their monthly costs during the loan term, which can help with short-term budgeting. However, you’ll need to plan ahead to cover the balloon amount plus any interest when the loan ends.

What amount can I choose as my balloon payment?

The amount you can set for your balloon payment is determined by your lender and can be influenced by factors like:

The value of the car
The length of the loan term
Your credit history and income stability
The age and type of vehicle

Generally, the maximum balloon payment is up to 50% of the car’s purchase price. Some lenders may also set a minimum balloon amount (e.g. $5,000 or 15% of the loan) to ensure it’s worth applying.

Since balloon structures can vary between lenders, speaking to a broker can help you understand what's common in the market and what options may work for your budget and financial goals. Get started with a free quote.

What can I do with my residual at the end of my car loan term?

If you have a balloon payment due at the end of your car loan, you’ll have a few options to settle the remaining balance:

Keep the car: if you’re happy with your vehicle and have the savings available, you can pay off the balloon amount in one go and continue driving your car.
Sell your car: you can sell the vehicle privately or to a dealer and use the proceeds to cover the balloon payment. If the sale price exceeds the balloon, you keep the difference.
Trade in your vehicle: many dealerships allow you to trade in your car and use its value to pay off the balloon. If your car’s value is higher than the balloon, you can put the extra towards your next vehicle.
Refinance: you may choose to refinance the balloon amount into a new loan, paying it off in smaller instalments. Just keep in mind this will extend your repayment period and increase the total interest paid.

How much will a car loan with a balloon payment cost me?

Taking out a car loan with a balloon payment will typically cost more overall than a standard loan without one. This is because you're charged interest on the balloon amount throughout the loan term. While a regular car loan gradually reduces to a $0 balance, a loan with a balloon only pays down to your car’s residual value, which continues to accrue interest the entire time.

In addition to the balloon, the total cost of your loan will depend on:

Loan amount: the more you borrow, the more you’ll pay in interest
Loan term: longer terms usually mean more interest over time
Interest rate: higher rates increase the total cost
Balloon size: larger balloons lead to higher overall interest charges

Let’s look at an example of how the repayments on a $30,000 car loan over 5 years at 7.5% p.a. compare with and without a balloon payment.

Loan	Monthly repayment	Balloon payment	total Interest	Total repaid
Without balloon	$601	$0	$6,068	$36,068
With 30% balloon ($9,000)	$477	$9,000	$7,623	$37,623

As you can see, adding a 30% balloon payment lowers your monthly repayments by $124. However, you’ll end up paying $1,555 more in interest over the life of the loan.

How are car loan balloon payments different from lease balloon payments?

Another option for getting a car is through a novated lease, which is a three-way agreement between you, your employer and a leasing company. At the end of the term, you can pay a residual sum to take ownership of the car – but the way this works is slightly different to a car loan balloon payment.

Balloon vs residual: What’s the difference?

Balloon payments apply to car loans and are usually a percentage of the loan amount, agreed on when you take out the loan. They reduce monthly repayments but must be paid in full at the end to finalise the loan.
Residual values apply to leases and represent the estimated future value of the vehicle at the end of the lease term. This figure is regulated by the Australian Taxation Office’s (ATO) minimum thresholds and takes into account depreciation. In leases, the residual is only paid if you decide to buy the car; otherwise, you simply return the vehicle.

Car loan vs car lease end-of-term payments

	Car loan with balloon	Car lease with residual
What is it?	Final lump sum based on loan amount	Predicted value of car at lease end
Applies to	Car loans	Novated leases
How it’s calculated	% of total loan amount	% of car's estimated market value at the end of the lease
Is it mandatory?	Optional	Yes – all novated leases must include a residual
Do you own the car?	Yes – from day one	No – you lease it until the end of the term
What happens at the end?	Pay balloon, refinance, trade in or sell car	Return car or pay residual to buy it

The pros and cons of balloon payments on car loans

Pros

Lower monthly payments

By deferring a portion of the loan amount to the end, your regular monthly payments are lower, potentially freeing up cash for other expenses or investments.
Easier on your budget

Having a balloon payment lowers your monthly repayments, which can be helpful if you have a limited budget initially but anticipate having a larger sum available by the end of the loan term.
End-of-loan flexibility

At the end of the loan term, you can clear your balloon by paying it outright, selling or trading in your car or refinancing it to extend your term.

Cons

Higher overall cost

Adding a balloon to your car loan can increase the amount you pay in interest by hundreds or even thousands of dollars.
Large final payment
You'll be responsible for a significant lump sum payment at the end of the loan term. This can be a burden if you haven't planned and saved accordingly or if your financial situation changes.
Potential negative equity

If the car's value depreciates faster than the loan amount, you may owe more than the car is worth at the end of the loan term. This could mean you end up having to cover the shortfall if the amount you receive from selling it or trading it in is less than the balloon.

Is a car loan balloon payment right for me?

A balloon payment can be a way to lower your monthly repayments, which may suit you if you’re looking to free up cash flow in the short term and are confident you can handle a lump sum at the end of the loan.

For example, it might work well if you:

Want to upgrade your car at the end of the term
Plan to sell or trade the car in at the end of the term
Are able to save towards the final payment

It’s also popular among small business owners who want to manage expenses and ensure cash flow while keeping a vehicle on the road.

However, if you’re someone who prefers to pay down your loan steadily or you’re not sure if you’ll be able to afford a large lump sum later, a traditional loan without a balloon might be a better fit.

Tip: Choose a car that’s likely to hold its value and start saving early if you’re considering a balloon. That way, you’ll be better prepared when the final payment is due.