Understanding balloon payments and how they work

What is a balloon payment?

A balloon payment is a one-off payment made at the end of a business vehicle or equipment loan term. It is typically larger than regular loan repayments.

Once you have decided which business vehicle or equipment loan you would like to purchase and finance, you and your lender can agree on a balloon payment. A balloon payment is dependent on the length of the loan term, asset type and the value of the asset.

Balloon payments are frequently used to free up cashflow for investment back into a business.

Advantages and disadvantages of using balloon payments

Balloon payments are considered useful because they give you the ability to repay your loan with lower weekly, fortnightly, or monthly repayments.

This can make it easier to plan your monthly budget and manage your expenses. It also frees up the extra money saved on lower repayments to put into other uses, from investing back into the business, to saving money for the balloon payment at the end of the loan.

As with anything, there are certain drawbacks to be aware of. For example, balloon payments incur a higher total loan cost because you must pay interest on a balloon payment over the lifetime of the loan. You will need to ensure that you have the lump sum payment ready at the end of the loan term.

Options at the end of the loan term

There are several options you can take at the end of the loan term, and you should consider them based on your circumstances.

• Payout the balloon in full and keep the asset.
• Sell the asset and payout the balloon, with proceeds from the sale.
• Keep the asset and refinance the balloon for a further term.

Factors to consider before opting for a balloon payment

Before considering a balloon payment on your loan, ensure the payment structure matches your business’ financial circumstances and goals.

Additionally, you should seek advice from your NAB business banker if you are still unsure.