What is a Balloon Payment?
What is a balloon payment and how can it benefit me?
Here at Vantastec, we pride ourselves on our flexible finance plans. We understand that some businesses might not be in the position to pay for one of our vehicles outright – and that’s completely fine. Initially, you may be asked whether you’d prefer a standard lease or a hire purchase. At that point, you might think to yourself: “What is a balloon payment?”
Our leasing options can include what is known as a ‘balloon payment’. We understand all this financial jargon can be confusing at times, and that’s exactly why we’re here to help. In this week’s edition of Finance Friday, we break down exactly what is meant by a ‘balloon’ when it comes to leases and how they can benefit – and sometimes hinder – your business…
What is a balloon payment?
So, exactly what is a balloon payment? When taking out one of our leases, you have the option to reduce your monthly payments in exchange for an increase in the fee you pay at the end of the agreement. This fee is known as a balloon. At the beginning of your lease, you’ll be asked if you want a balloon. These fees are based on the predicted value of the vehicle at the end of the agreed term, but are restricted by the vehicle’s mileage.
You’ll find this commonly on finance lease arrangements. When the vehicle is sold at the end, the balloon will come out of the value the vehicle is sold for. Of course, the benefit of increasing your balloon is you’re paying less on your monthly fees. However, this could sometimes result in you being worse for wear at the end of the finance period.
What are the downsides of having a balloon payment?
At the end of a standard finance lease, the vehicle is sold and the customer receives around 95% of the surplus sale. Commonly, the balloon payment will come out of the sum the vehicle is sold for. The customer is then offered the chance to continue the lease through what’s known as a peppercorn rental, or, once the van has sold, you can use the funds from the surplus sale to pay a deposit on another vehicle.
If a customer opts to increase their balloon, then it means you’re suffering from decreased returns on the surplus sale. Whereas if the balloon remains low, you’re receiving a fairer deal on the money you get back from the surplus sale.
- If the vehicle sells for £10,000 after the lease and your balloon is £2000, then the customer has £8000 to put into another van or reinvest into their business.
- If the balloon is £4000, then the customer is only receiving £6000 to put towards another van or back into their business.
- If the vehicle is valued at less than the balloon payment, then the customer must pay the difference!
It’s for this reason we encourage customers to reduce their balloon payment if they’re able to, so they can get the best returns on their finance at the end of the lease.
We understand that everyone’s financial situation is different, and for that reason, we can’t give you a distinct recommendation. We can present you with the information to make an informed choice, so we hope this helps.
If you’re looking to reduce your monthly payments, confident you can keep your van in good condition and aren’t bothered about paying the extra fee at the end, then increasing your balloon may be the right choice for you.
Reducing your balloon could bring you a better financial deal in the long term. It lowers the risk of having to pay the difference between what the van sells for and the balloon amount, and of course, there’s always the option not to have the balloon at all!