What is a balloon payment?
A balloon payment is a lump sum left owing at the end of a loan term, structured up front so the regular repayments along the way are lower. It’s common on vehicle and equipment finance, where the balloon is set against the asset’s expected value at the end of the term. When the term ends you generally refinance the balloon, pay it out in cash or sell the asset to clear it.
How the balloon is set
Instead of the loan amortising fully to zero, the lender and borrower agree on a final lump sum up front, often linked to what the asset is expected to be worth when the term ends. A bigger balloon means smaller regular repayments along the way. A smaller balloon means higher regular repayments but less owing at the end. Lenders generally cap the balloon at a level they consider realistic against the asset, rather than letting it be set arbitrarily high.
The risk worth planning for
The balloon doesn’t disappear. It has to be refinanced, paid out or covered by selling the asset when the term ends. If the asset is worth less than the balloon at that point, you cover the gap yourself. This is sometimes called being upside down on the loan. Planning ahead for how the balloon will be cleared, rather than assuming a refinance will always be available, is worth doing well before the final payment falls due.
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Last updated 15th July 2026. Reviewed by Authorised Credit Representative 554584 of Australian Credit Licence 414426.