A balloon payment is a lump sum which is the last payment on your loan. Balloons are more common with vehicles bought for business purposes however they can be used for some personal financing. For many people they opt to trade the car in, clear the balloon and negotiate to buy their new car.

A balloon has the impact of reducing repayments – as you aren't clearing the loan in full over the term. The trap for many clients whether the car is used for personal or business is they take a balloon that is too high to keep repayments lower. At the end of the term the balloon is higher than the trade in value of the car! This is sometimes referred to as negative equity. It often arises as the client has purchased a car that is more expensive than they could comfortably afford.

We look at an actual quote we did for a client on 22nd November.

• $40,000 purchase price of car

• 48mths loan term i.e. 4 years

• 4.60% base rate

• 40% balloon ($16,000)

• $607.37p/m (payments in advance)

In this example client expects the car value to be $16,000 in 4 years time. If they take a higher balloon the repayments fall however they run the risk that the car's value may fall short of payout in 4 years time.