A balloon payment (also called a residual payment) is a lump sum left owing at the end of a finance term, instead of being spread evenly across your regular repayments. Setting one lowers your monthly repayment during the term, but you still owe the full balloon amount on the final due date - it does not disappear.
How a balloon payment actually works
A normal loan divides the full amount you are borrowing evenly across every repayment, so the balance reaches zero on the last one. With a balloon structure, you agree upfront to defer a set portion of the amount borrowed - often 20-40%, though it varies by lender and asset - to the end of the term instead. Your regular repayments only cover the remaining balance, which is why they are lower than an equivalent loan with no balloon.
At the end of the term, the balloon becomes due in full. Most borrowers handle it one of three ways: refinance it into a new loan, sell or trade in the asset and use the proceeds to cover it, or pay it out in cash.
Why lenders and borrowers use them
A balloon is usually sized around what the asset is realistically expected to be worth at the end of the term - the theory being you are only financing the portion of its value you actually use up. For a business asset that keeps earning income throughout the loan, a smaller monthly repayment can matter more than the total interest paid, which is why balloons are common in equipment and vehicle finance for businesses that want to preserve cash flow.
The main risk: depreciation
A balloon payment is fixed at the amount agreed when you signed, regardless of what the asset actually turns out to be worth at the end of the term. If it depreciates faster than expected - which happens more often with vehicles than with some other equipment - you can end up owing more than the asset would sell for, sometimes called being in a negative equity position. That is worth weighing against the smaller repayments a balloon gives you along the way.
Balloon payment vs. no balloon: a worked example
| Structure | Monthly repayment | Owing at end of term |
|---|---|---|
| $40,000 financed, no balloon, 5-year term | Higher | $0 |
| $40,000 financed, 30% ($12,000) balloon, 5-year term | Lower | $12,000 due in full |
Figures above are illustrative only, to show how the two structures compare - not a real offer or quote. The exact balloon amount, interest rate and total cost depend on the lender, the asset and your circumstances. For how a balloon fits into the full cost of a loan - not just the monthly figure - see our guide to comparing the total cost of finance.
Questions to ask before agreeing to a balloon
- What is the balloon amount, in dollars, not just a percentage?
- What happens if I want to sell or trade the asset before the term ends?
- Can I make extra repayments to reduce the balloon early, without a penalty?
- What are my options at the end of the term - refinance, sell, or pay out - and does the lender charge anything for arranging any of them?
The takeaway
A balloon or residual payment trades a lower repayment now for a lump sum owing later. It can genuinely suit a business asset that earns its keep during the loan term, but it is not automatically the cheaper option once you account for the balloon itself - compare the total cost, not just the monthly repayment, before agreeing to one. loan-o can review any finance offer, balloon structure included, for free before you sign.
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Finance is subject to lender approval, lending criteria, terms, conditions, fees and charges. The information in this article is general and does not take into account your personal or business needs.
Last reviewed: 29 September 2026. This content provides general information only. It should not be treated as personal financial, tax, legal or credit advice.
Frequently asked questions.
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They describe the same thing. "Balloon payment" is more common in business and equipment finance; "residual payment" (or "residual value") is more common in consumer car finance and novated leases. Both mean a lump sum owing at the end of the term.
No. Most borrowers refinance the balloon into a new loan, trade in or sell the asset and use the proceeds to cover it, or pay it out in cash if they have the funds. Which option makes sense depends on what the asset is worth at that point compared to the balloon amount.
You still owe the full balloon regardless of the asset's market value at the end of the term. This is the main risk of a balloon structure - if the asset depreciates faster than expected, you can end up owing more than the asset is worth.
It depends on the purpose. For a business asset that generates income during the loan term, a balloon can free up cash flow when it matters most. For a personal car loan, it mainly lowers the advertised monthly repayment - worth checking the total cost over the full term, not just the monthly figure.
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