Car Finance is a phenomenon of the Consumer Credit Age; a product the use of which has increased exponentially in recent years. The irony of this though is that whilst it is widely used by the general public – the levels of understanding of the nuances (and often even the basics!) are generally low. So to help our readers with this – as we at Carsnip believe in the old adage of being better informed and subsequently better prepared – find below our explanation of the one of the major parts of car finance; the Balloon Payment.
For more general information regarding Car Finance, see our guide on HP vs. PCP!
What is a Balloon Payment?
The term Balloon Payments is relevant to the PCP style of Car Finance (Personal Contract Purchase). It is a colloquialism for a ‘GMFV’ (Guaranteed Future Minimum Value). This is a figure worked out by the finance house / seller of the car being purchased that represents what they expect the car to be worth following the proposed finance contract; taking into account variables agreed by the customer such as the term of the agreement and the amount of miles to be driven.
The PCP style of finance was created in order to allow people to change their cars regularly* more easily – and in a way it does just that – it is just a shame that it is such a complex solution.
*Did you know in the UK the most common ownership period for a car is 3 years – exactly the
same as the most commonly sold PCP finance period! Coincidence? We will let you decide…
Do I have to make the Balloon Payment?
The GMFV is set up to be paid at the end of the finance contract – but is optional (weirdly right?) Well the reason for this is that you can choose to make the GMFV payment at the end of your agreed contract (assuming you have kept up with all monthly agreed payments), and keep the car. However you can also chose to hand the car back, and have nothing more to pay (including not paying the GMFV). Sometimes there may be some equity for the customer to put towards a new vehicle – although this is by no means guaranteed and is often non-existent.
Can I refinance the Balloon Payment?
The simple answer is: Yes. You can indeed refinance the balloon payment if you wish to keep the car; although you may have to do so through personal finance (such as a personal loan) as not all Car Finance providers offer integrated refinancing options. This means that you will essentially ending one credit agreement and starting a new one. You will therefore end up keeping the same car, so make sure you are happy to continue with the same car.
Can I sell the car to make the Balloon Payment?
Again the quick answer is: Yes. However there are various things to keep in mind should you choose this course of action; chiefly that you must be upfront with any potential purchaser (assuming a private sale) that there is still finance outstanding on the car. The safest option to make the transaction go as smoothly as possible in this scenario is to have the purchaser call the finance company and make their payment for the car to clear the finance. They can then pay any remainder from the agreed sale price to you (or you can make a separate payment to the finance company if the agreed price wasn’t enough to settle the finance).
NOTE: Legally to complete the sale of the vehicle (as you don’t technically own it under the terms of a PCP contract) any outstanding finance must be completely cleared. Therefore if a sale price has been agreed that doesn’t cover the outstanding figure on the finance; you MUST be prepared to cover the remainder yourself.
As an example:
If you have a car that is at the end of its PCP contract with a GMFV of £14,600.00, an overall settlement figure of £15,000.00 (due to say, one more monthly payment being due) and you agree to sell the car to a private purchaser for £14,850.00, then the purchaser can make their entire payment to the finance company. You then take over the call, pay off the remaining £150.00 of the outstanding total, and everyone is happy. The finance company has the money they are owed, you have sold the car, and the purchaser can drive away in their new wheels!
Of course in an ideal world there would be money left over in the agreed sale price that some ends up in your pocket; but this is greatly dependent on variables specific to the car and the transaction itself.
The takeaway point from this; always prioritise the finance companies interests in this situation – as they technically own your car until they have been paid in full. You are essentially selling something owned by someone else, so take care to ensure your sale meets everyone’s requirements.
Can I trade in the car to make the Balloon Payment?
You can, and it is essentially a simpler version of the above description of the process of a private sale. The concept is identical, the difference is that the garage you trade into will understand this process well, and take care of the transaction for you. You may still have to pay if the agreed trade in price is insufficient to cover the outstanding figure; but the garage may let you roll this up into the purchase price of another car. You of course would hope to have credit for the trade in to put towards your new purchase – but again this will be specific to your transaction.
You mentioned handing the car back?
The final option is to hand the car back to the original garage / dealership from which you bought the car. In this situation (as mentioned above) you do not make any further payments (assuming you have met all monthly payments and fees throughout the contract) and you will either have nothing to pay, or you may have a small amount of equity in the car when you hand it back. If there is equity you can put this towards another car with the garage you are handing the vehicle back to.
NOTE: I have left this explanation until last on purpose; despite it being the most popular and most used option. Essentially this option is what garages / dealerships WANT you to do – and as it means that they get your repeat business. However in practice the ‘Handing Back’ option is EXACTLY the same as trading the vehicle in with any other garage (see above), so the savvy option is to find the new car you want, and take the car and get a trade in value with the garage selling your new vehicle. You can then compare this with the ‘Handing Back’ option equity figure being offered – and usually it will be broadly similar (or potentially even better).
Essentially, don’t let yourself be pushed into forced repeat business with your exiting garage because it seems to be ‘the easiest thing to do’. It is exactly the same process; and we at Carsnip encourage our customers and our users to only give repeat business to dealerships whose customer service levels deserve them; we don’t promote blind loyalty!
This Balloon sounds like too much to deal with!
If this is how you feel, don’t worry! Firstly, you are not alone. Lots of people struggle to get their heads around the complexities of this; and some prefer to just avoid the matter altogether.
Luckily for those people there are several options available:
- HP (Hire Purchase) Car Finance. This is a different style of car finance that essentially skips the GMFV by offering the customer longer contract terms and / or higher monthly payments. Once a HP contract reaches its end (assuming all monthly payments have been made and any fees paid) the purchaser owns the car outright.
- Personal Finance – You can get personal loans or other multiple other forms of personal liability credit (rather than asset-based credit like HP & PCP). These options need fully researching for suitability of the applicant on an individual basis.
- Savings / Windfall – Cars can of course be purchased outright from savings or windfall.
However dealerships and garages often offer discounts for finance being taken, so factor this in to your individual situation.
The above is intended as information only, and does not constitute advice. Everyone’s situation is different and relevant to their own individual circumstances; so if you are still unsure what is best then speak to an expert or a consumer credit adviser.
Clearly Balloons aren’t for everyone (unless you are at a 6 year olds birthday party!) Just make sure that you are always well informed before signing any credit agreements, and always ensure ongoing affordability relevant to your personal finances. Beyond that, we wish you the best of luck your new wheels! Check out a selection of our 800k cars below to see if we can point you towards the car of your dreams!
Carsnip is the UK’s largest used car search engine, with over 500,000 dealer sold used cars across the UK. We operate a natural language search engine, to help you find your perfect used car, and narrow down the choice by what’s most important to you.
About the Author
Sam Wardega is Carsnip.com’s very own in house car guru and journalist.
A lifetime Petrolhead who started with Hot Wheels aged 2, and now just spends his life savings on owning his dream cars. As they say, boys don’t stop playing with toys; they just get bigger and more expensive!
Disclaimer: The content contained in this article is for information only purposes, and does not constitute financial advice in any way. Carsnip is a search engine for buyers to find a new car, and does not endorse any of the finance products presented by the dealers who may advertise our website. This information is correct at the time of publishing. Any queries should be directed to firstname.lastname@example.org