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Chattel Mortgage Balloon Payments
A balloon payment is an optional larger final repayment made at the end of a chattel mortgage. It reduces your regular repayments, but leaves a lump sum to pay when the loan term ends.
How Does a Balloon Payment Work?
- Choose the amount: You agree on a balloon payment with your lender when arranging the loan.
- Lower regular repayments: A portion of the loan remains outstanding, reducing the amount repaid throughout the loan term.
- Final payment: The agreed balloon amount becomes payable at the end of the loan.
For example, a $15,000 balloon payment means that $15,000 remains payable after your regular repayments have been made.
A balloon payment can help with business cash flow, but generally increases the total interest paid compared with the same loan without a balloon payment.
Why would I choose a balloon payment?
A balloon payment reduces regular repayments, freeing up cash for other business expenses. However, you’ll need to plan for the larger final amount.
How much can my balloon payment be?
The maximum amount depends on the lender, loan term, asset type and value. Some lenders restrict the balloon amount to a percentage of the asset’s purchase price.
Does a balloon payment increase the cost of finance?
Generally, yes. Because more of the loan remains outstanding during the term, you’ll usually pay more interest than you would on an equivalent loan without a balloon payment.
What happens when the balloon payment is due?
You can pay the amount in full, sell the asset and use the proceeds to repay it, or apply to the outstanding amount. Refinancing is subject to lender approval.
What if the asset is worth less than the balloon payment?
You’re still responsible for the full amount owing. If selling the asset doesn’t cover the balloon payment, you’ll need to pay the shortfall.
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