Balloons – worth it or not?

A balloon payment is a lump sum paid at the end of a finance agreement, that is larger than all of the payments for the duration of the agreement. 

Whilst balloon or residual payments can come under different names, they are something most people are familiar with.  Think about Autotrader – you will have the option to select either PCP or Hire Purchase.  PCP is Personal Contract Purchase and consists of a regular monthly payment with a maximum mileage per annum. 

As the name suggests Personal Contract Purchase isn’t available for businesses, however a similar model exists called contract hire, and additional mileage charges still apply.  Additionally standard hire purchase and finance lease agreements can be arranged with a balloon, however unlike PCP and contract hire there aren’t additional mileage charges.  The balloon payment is calculated according to the anticipated mileage per annum.

We are often asked if we can quote finance figures for a vehicle with a balloon.  We can be hesitant to provide this without knowing the reason behind the request.  We are not being awkward, but it is dependent on what you are trying to achieve and what is important to you, as to whether a balloon is the correct solution.

There are several reasons for this:

1. You are borrowing a lump sum and accruing interest for the duration of the agreement, resulting in higher overall interest
2. Whilst the end of the term may be a long way away, the balloon will ultimately become payable.  This will either leave a dent in your cashflow, equity or result in you paying interest on interest if you choose to refinance the balloon
3. In some cases, there are less funders who will offer balloons, and those funders may be more expensive, slower etc.

So we tend to ask our customers, which of the following is the most important to them:

• The ownership of the vehicle at the end of the term
• The overall interest paid
• The size of the monthly payment
• The length of the term

Often it transpires that the customer’s priority is the lowest monthly payment possible along with the lowest overall interest paid.  On this basis we would then generally suggest (after consultation with the customer’s own accountant), that the customer goes for the term that falls in line with the budgeted monthly payment.

The interest overall without a balloon is less than if a balloon had been written into the finance agreement.  For example, based on current rates, over a 3 year term with no deposit there is £1,000 more interest payable over the term if a 25% balloon is utilised.

Of course we appreciate that to some customers the appeal of the lower monthly payment is enough to feel that a balloon payment gives the best of both worlds.  In these scenarios, we would need the cost and full specification of the vehicle (can often be found on the sales order from the dealer), the preferred term and anticipated annual mileage.  This will enable us to obtain an accurate balloon figure from the funder and provide you with realistic and competitive figures to make a decision from.  

Our aim is to ensure that when the agreement is activated and set live, that you are completely happy with every aspect of it.  As a result we can be as flexible as required to ensure that the solution is right for you. This includes turnaround times within 24 hours and regular updates as well as covering all agreement types with you.  We have recently won several agreements off motor dealers, on the basis that their finance approach is more one size fits all, which we understand is very rarely the case!