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As one of the most popular choices when it comes to car finance, Personal Contract Purchase (PCP) is a finance package that allows for much more flexibility than most.
The core element that allows for this is the Balloon Payment - something that you may find under different wording - let’s deep dive into what it means.
What is a balloon payment?
A balloon payment is a large lump sum which is left until the end of certain car finance agreements.
Most commonly associated with Personal Contract Purchase (PCP) finance, the balloon payment may also be noted as an optional final payment.
These are payments that you do not need to pay until the end of the contract, where you decide whether you would like to buy the car fully.
How does a balloon payment work?
Relatively simple, the balloon payment is part of the amount required to own the car, it has just been deferred until the end of the agreement. This creates a large final sum, whilst helping to keep the monthly payments at a lower price.
When it comes to PCP finance, the balloon payment is typically fully optional.
PCP gives you the option to return or part exchange your car instead of buying it, where you do not need to pay this amount.
However, if you decide you want to keep and buy the vehicle, you would need to pay the amount in full.
What if the car is worth more or less than the balloon payment?
If the current value of the car is higher than the optional final payment, then there may be positive equity. This equity could contribute towards another vehicle or finance agreement, lowering the overall costs.
However, if the car is worth less than the balloon payment, then paying the lump sum may not be the most attractive option.
The balloon payment is a safety net, which helps you make a decision if the car ends up being worth less in the market than first thought. In this situation, it may be worth looking towards finding another car, rather than paying the balloon payment of the current vehicle.
Can you refinance a balloon payment?
If you want to keep the car but are unable to pay the balloon payment as one lump sum, then there is the option to refinance. This lets you finance the balloon payment instead of one large payment.
Although this may be ideal, it is not an easy thing to do. With Stoneacre, you may be eligible to refinance your balloon payment if you acquired the vehicle through us, however, it is not a guarantee.
Benefits & Things to Consider with Balloon Payments
- Lower monthly payments on PCP deals
- The amount is agreed in advance
- It defers part of the overall cost
- You may not need to pay it
- It can be a substantial cost
- Refinance is not guaranteed
- The balloon payment and market value may differ
- You do not own the car until the payment and fees are paid
Balloon Payment FAQ
Representative Example
This represents an average of the deals that our customers receive on other vehicles
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