If you're comparing PCP deals, the balloon payment is the big number sitting at the bottom of every quote. Whether you have to pay it, and what happens if you can't, both depend on how it's set on day one.
What is a balloon payment on car finance?
A balloon payment on car finance is the large final payment at the end of a personal contract purchase (PCP) agreement. You only pay it if you want to keep the car. Because this lump sum is held back until the end, your monthly payments are usually lower than they’d be on hire purchase (HP) for the same car.
Your quote may call it the optional final payment or the Guaranteed Minimum Future Value (GMFV). Both names point to the same figure, the car's estimated value after depreciation at the end of the car finance agreement. That's why your monthly payments only need to cover the drop in value, plus interest.
Use our car depreciation calculator to estimate how much value your car could lose over time.
The balloon payment is agreed before you sign, so you know the figure from the start. Pay it at the end, and you own the car outright. You don't have to pay it, though. You can hand the car back instead, as long as you've stayed within your mileage allowance and kept the car in good condition (allowing for fair wear and tear).
How is a balloon payment calculated?
A balloon payment equals the Guaranteed Minimum Future Value (GMFV), the lender's estimate of what your car will be worth when the agreement ends. Your lender sets the GMFV at the start, and you may also see it called the guaranteed future value (GFV) or residual value (RV).
The GMFV depends on the car's make and model, its age, the fuel type, your annual mileage, the length of the agreement and the condition you're expected to return it in. Cars that hold their value well get a higher GMFV, which leaves less to cover through your monthly payments.
Your mileage allowance is one part you control. A higher allowance means more wear on the car, so the GMFV drops and your monthly payments rise. A longer agreement works the same way, because the car will be older when it ends.
A bigger deposit doesn't change the balloon payment. The deposit lowers the amount you borrow, so your monthly payments fall, but the GMFV stays tied to the car's predicted value.
Do you pay interest on a balloon payment?
Yes, you pay interest on the balloon payment from the first month, because your lender charges interest on the full amount borrowed, not only on the part that covers depreciation. That’s why the total amount payable on PCP can be higher than on HP for the same car, even though the monthly payments are lower.
The balloon payment itself doesn’t grow. The interest on it is spread across your monthly payments instead. So if you hand the car back at the end, you won’t pay the balloon payment, but the interest you’ve already paid on it isn’t refunded.
Car refinancing works differently. If you spread the balloon payment over a new HP agreement or personal loan, you’ll pay fresh interest on that amount under the new deal. So when you compare quotes, look at the total amount payable as well as the monthly figure, because the total shows what the agreement costs you in full.
Balloon payment example
A balloon payment of £12,527.74 on a car with a cash price of £25,485 means you’d pay £12,527.74 at the end of the agreement to keep the car. That’s roughly 49% of the price, held back until the end so your monthly payments stay lower.
- Cash price: £25,485
- Deposit: £3,000
- Term: 48 months
- Monthly payment: £240 — 47 payments
- Balloon payment (optional final payment): £12,527.74
- Option to purchase fee: £0
- Representative APR: 1.9%
- Total amount payable: £26,807.74
If you hand the car back at the end, you don’t pay the £12,527.74 balloon payment. There’s no option to purchase fee in this example. Excess mileage and vehicle condition charges may apply; the example allows for 32,000 miles over the agreement.
If you keep it, the £26,807.74 total amount payable is what you’ll have paid to buy the car, including your deposit and interest.
Do I have to pay the balloon payment?
No, you don't have to pay the balloon payment unless you want to keep the car once the agreement ends. When your last monthly payment goes out, PCP gives you four ways to finish.
- Pay it: pay the balloon payment and any option to purchase fee, and the car becomes yours.
- Part-exchange: trade the car in at a dealer, who settles the finance with your lender, and put any positive equity towards your next car.
- Hand it back: return the car and walk away, apart from charges for excess mileage or damage beyond fair wear and tear. Your agreement sets out the excess mileage rate per mile.
- Refinance it: spread the balloon payment over a new agreement, such as HP or a personal loan, and keep the car.
The best route depends on what the car is worth compared with the balloon payment, so get a valuation a few months before the end date.
What if your car is worth more or less than the balloon payment?
Your balloon payment stays fixed whatever your car is worth at the end of the agreement. That's why a higher market value works in your favour, while a lower one becomes the lender's loss if you hand the car back.
A car worth more than the balloon payment gives you positive equity. Say the car is valued at £15,000 and the balloon payment is £12,527.74. You’d have £2,472.26 of equity, which a dealer can put towards the deposit on your next car. You can also pay the balloon payment, sell the car yourself and keep the difference as cash, less any fees or selling costs.
A car worth less than the balloon payment leaves you in negative equity. Hand it back within your mileage allowance and condition terms, and the lender covers the shortfall. But if you pay the balloon payment to keep the car, you'd be paying more than it's worth on the open market.
Can you negotiate a balloon payment?
No, a balloon payment can't be changed once you've signed, because the GMFV is fixed in your agreement. You can shape it before you sign, though, by choosing a different term, mileage allowance or car.
Refinancing changes how you pay the balloon payment at the end, not the amount. A refinance is a new agreement, with its own credit check and interest rate, rather than a change to the old one.
What happens when the balloon payment is due?
When the balloon payment is due, your lender will ask which end-of-agreement option you want, and many lenders collect the payment automatically if you don't reply. So it's worth telling your lender your choice well ahead of the end date.
Paying the balloon payment and the option to purchase fee makes you the car's legal owner. Until then, you're the registered keeper (the name on the V5C logbook), but the lender owns the car. The option to purchase fee is usually a small one-off charge listed in your agreement.
What happens if i can't pay my balloon payment?
If you can't afford the balloon payment, you can usually refinance it, part-exchange the car or hand it back, as long as you speak to your lender before it's due. Which route fits depends on whether you want to keep the car.
To keep the car, most drivers refinance the balloon payment with a Hire Purchase (HP) agreement or a personal loan, which turns the lump sum into monthly payments. The new lender runs its own affordability check, so approval isn't guaranteed. Savings are the other option, if you've been putting money aside during the term.
Struggling before the agreement even ends? Voluntary termination may help. Once you've paid half the total amount payable, including the balloon payment, the Consumer Credit Act 1974 gives you the right to end the agreement and hand the car back. On PCP you tend to reach that point late in the term, but you can pay the difference to get there sooner. You may still be charged for damage beyond fair wear and tear.
What happens if you don't pay the balloon payment?
An unpaid balloon payment counts as a missed payment, and your lender will send you a default notice giving you at least 14 days to pay or agree to a plan. If that deadline passes, the lender can end the agreement, ask for the full balance and take steps to get the car back.
A default stays on your credit file for 6 years, even after it's paid, which makes borrowing harder in that time. If the lender takes you to court, you could also end up with a County Court Judgment (CCJ).
There's a safeguard, too. Once you've paid a third of the total price, your lender usually can't repossess the car without a court order or your consent.
Can you pay off a balloon payment early?
Yes, you can pay off a balloon payment early by settling the whole agreement, because your settlement figure includes the balloon payment. The Consumer Credit Act 1974 gives you this right, and your lender must send the figure within 7 working days of your request.
A settlement figure is usually valid for 28 days. It takes off the interest you'd have paid for the rest of the term, although the lender can add a short period of interest after the date you settle.
Some lenders also charge compensation for settling early. It can't be more than 1% of the amount you repay early. If there's less than a year left, the cap drops to 0.5%. And it only applies once you repay more than £8,000 within a year.
Settling early makes most sense when the car is worth more than the settlement figure, so compare the two before you pay.
Which types of car finance have a balloon payment?
Personal Contract Purchase (PCP) always has a balloon payment, and some Hire Purchase (HP) deals add one to bring the monthly cost down. On standard HP, you repay the full price over the term and own the car after the last monthly payment.
Other types of car finance have no balloon payment at all. Conditional Sale works much like HP, and you own the car automatically once the final monthly payment clears. Personal Contract Hire (PCH) is a long-term rental, so you hand the car back at the end and there's nothing to buy. With a personal loan, you own the car from day one and repay the loan rather than the car.
Is a balloon payment a good idea?
A balloon payment is worth it when you want lower monthly payments and you'll either hand the car back or have a plan for the lump sum. It suits drivers who change cars every few years, because they may never need to pay it.
The upside is a lower monthly cost and a fixed final figure you know from the start. The trade-off is a higher total cost if you keep the car, because you pay interest on the balloon payment throughout. And you won't own the car unless you find that lump sum at the end.
Want a newer car on a tighter monthly budget? PCP fits. Plan to keep the car for years? HP usually costs less overall, and the car is yours after the last payment. For most drivers who like to switch cars regularly, we'd pick PCP.
If you'd like to see what a PCP deal could look like for you, Carplus can check your options with a soft search, so there's no impact on your credit score.
Table of Contents
