Payments of 320 that are really more than 650 a month. How to work out the real cost of a car with a balloon payment.
Key findings
- A 25,000 car with a deposit, 36 payments of 320 and a 12,000 balloon costs 27,020 in total.
- That extra 2,020 is equivalent to an interest rate of 4.04% a year.
- To pay the balloon without another loan, you need to set aside 333.33 a month on top of the payment.
How it works
With balloon payment car finance (also called a final payment or PCP-style deal), you pay a deposit, a series of low monthly payments and, at the end, a large lump sum. The payments are low because a big part of the price is left for that final payment.
When the end comes, you can usually pay the lump sum and keep the car, refinance it with another loan or hand the car back under the terms of the contract. Each option costs something different, so it pays to know before you sign.
An example with numbers
A hypothetical car costing 25,000 in cash, financed with:
- a 3,000 deposit,
- 36 payments of 320 (11,520 in total),
- a final payment of 12,000,
- 500 of setup fees.
If you keep it, you pay 27,020 in total: 2,020 more than paying cash. Spread over time, that extra cost is equivalent to an interest rate of 4.04% a year. That is the figure to compare with a personal loan, or with what your money would earn if you paid cash.
The problem with the balloon payment
The 12,000 at the end does not go away. To pay it without another loan, you would need to set aside 333.33 a month for the 36 months, on top of the 320 payment. Seen that way, the car costs you more than 650 a month, not 320.
If you do not have that money at the end and finance it, you keep paying interest on a large sum for more years, and the total cost goes up.
What to check before signing
- The total cost and the APR, with every fee and mandatory product (insurance, servicing).
- The conditions for handing the car back: mileage limits, required condition and what happens if the car is worth less than the final payment.
- Whether you will be able to pay the balloon, or what refinancing it would cost.
- The alternative: a standard loan, a cheaper car or saving up first.
Work out the real cost of your offer with the car finance calculator and the APR of a loan with the APR calculator.