Written byA balloon refinance is a new loan taken out to pay the balloon payment owed at the end of a car or equipment finance term.
Also known as: balloon rollover, refinancing a balloon payment, residual refinance
Key points
- The final lump sum is a balloon on a loan, a residual on a lease, and refinancing spreads it over a new term.
- On a lease the same amount is the residual value, and it can often be refinanced the same way.
- It is a new credit application: the lender reassesses your finances and the age and value of the asset.
- Refinancing keeps you in the asset but you pay interest for longer, so the total cost rises.
How a balloon refinance works
Car loans and chattel mortgages often finish with a balloon, and leases with a residual: a large final amount the regular repayments were never meant to clear. When that date arrives you either pay it or you find new finance for it. A balloon refinance is the second path. A lender advances the payout figure on the old contract and you repay that amount over a fresh term.
The new loan is usually secured against the same vehicle or equipment. It is normally shorter than the original term because the asset is older. Some lenders will refinance a balloon with another balloon at the end; others insist the new loan reduces to zero.
What lenders look at
Because this is a new loan, the lender starts from scratch. It will look at how you handled repayments on the original contract, your current income or business cashflow, and any other commitments you carry. For a business, recent BAS lodgements and bank statements usually do most of the work.
The asset matters as much as you do. Lenders set maximum ages for vehicles and equipment at the end of a contract, and they compare the market value against the balloon owed. If the asset is worth less than the balloon, that gap has to be covered another way, often with a cash contribution or a shorter term.
Costs and other options
Refinancing a balloon is not free. There is usually an establishment fee on the new loan, and sometimes a payout or termination fee on the old one, so ask for the full payout figure in writing before you commit.
Price the alternatives at the same time. You can pay the balloon from savings, sell or trade the asset and use the proceeds to clear it, or on some lease contracts hand it back under the end of term options. Which one wins depends on what the asset is worth, how much longer you want it, and what the new repayments do to your budget.
Example
A landscaper reaches the end of a five year chattel mortgage on a $70,000 tipper with a $21,000 balloon. She wants to keep the truck for another two or three years, so her broker arranges a new loan for the balloon amount over three years, secured against the same tipper. The lender checks the truck's age and value, her BAS and her repayment record, then settles on the day the balloon falls due. Her repayments drop well below the old ones, but she is paying for the tipper across eight years in total rather than five.
Not to be confused with
- Balloon payment
- the balloon payment is the lump sum itself; a balloon refinance is the new loan that clears it
- Refinancing
- refinancing usually replaces a whole loan, while a balloon refinance deals only with the final lump sum
Frequently asked questions
How does a balloon refinance work?
The lender pays out the balloon owed on your existing contract and gives you a new loan for that amount, usually secured against the same asset. You then repay the new loan over a fresh term, often one to three years, with or without another balloon at the end.
Can you refinance a balloon payment?
Usually yes, if the lender is comfortable with your finances and the asset. It is a new application rather than an automatic rollover, so the answer depends on your repayment history, your current income or cashflow, and the age and value of the vehicle or equipment.
What happens if you cannot pay the balloon payment?
Make a plan before the due date. The usual options are refinancing the balloon, selling or trading the asset to clear it, or paying it from savings. If you do nothing the contract falls into default, and the lender can repossess the asset and pursue any shortfall.
How long can you refinance a balloon over?
Terms are usually short, often one to three years, because lenders limit how old an asset can be when a contract ends. A newer, well maintained asset generally attracts a longer term than a tired one. Ask the lender what age limits apply before you plan around a term.
Is it cheaper to refinance a balloon or pay it out?
Paying it out costs less overall because the interest stops. Refinancing costs more in total but keeps cash in your pocket now. Compare the total of the new repayments and fees against the cash you would hand over today, then decide which suits your budget.
Related terms
Balloon payment
A balloon payment is a lump sum, agreed upfront, that is paid at the end of a loan term and lowers the regular repayments by deferring part of the principal.
Read definitionRefinancing
Refinancing is replacing an existing loan with a new one, from the same or a different lender, to change the interest rate, term or features, or to release equity.
Read definitionResidual value
Residual value is the amount a leased car or asset is expected to be worth when the lease ends, set at the start and used to calculate the rentals.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionCar loan
A car loan is a credit contract used to buy a vehicle: the lender provides the funds and you repay them over time with interest.
Read definitionPayout
A payout is the total amount needed to close a loan or lease on a given date: the balance owing, accrued interest and any break costs or fees.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.