What Is a Balloon Payment?
A balloon payment is a larger lump-sum payment due at the end of a finance agreement. Instead of paying off the asset evenly over the term, you defer a portion to the final payment — reducing your monthly repayments.
In asset finance, "balloon payment" and "residual value" are often used interchangeably, though technically:
- Balloon payment — generally used with chattel mortgages (optional, no ATO minimum)
- Residual value — generally used with finance leases (mandatory ATO minimum applies)
How Balloon Payments Affect Your Repayments
Setting a balloon reduces the principal repaid during the term, which lowers your monthly payment. Here's a comparison:
| Scenario | Monthly Payment | Total Interest | Balloon Due at End |
|---|---|---|---|
| $80K, 5yr, 7% — No balloon | $1,584 | $15,058 | $0 |
| $80K, 5yr, 7% — 20% balloon ($16K) | $1,356 | $17,343 | $16,000 |
| $80K, 5yr, 7% — 35% balloon ($28K) | $1,185 | $19,095 | $28,000 |
Key insight: A balloon reduces monthly payments but increases total interest paid over the life of the loan, because you're paying interest on a higher outstanding balance for longer.
ATO Minimum Residuals (Finance Leases Only)
For finance leases, the ATO mandates minimum residual values:
| Lease Term | Minimum Residual |
|---|---|
| 1 year | 65% |
| 2 years | 45% |
| 3 years | 30% |
| 4 years | 20% |
| 5 years | 15% |
A chattel-mortgage balloon is not the same as a finance-lease residual. Availability and amount depend on the asset, term, approval and written agreement; a generic percentage is not an entitlement.
What Happens at the End of the Term?
When your balloon payment comes due, you typically have several options:
- Pay it in cash — use savings or business profits to pay the lump sum
- Refinance it — take a new loan to cover the balloon, spreading it over more months
- Sell the asset — use the sale proceeds to pay the balloon (works well if the asset has retained value)
- Trade up — use the equity in the asset toward a new finance agreement
Watch Out
If the asset has depreciated below the balloon amount, you may owe more than it's worth. This is common with vehicles that depreciate quickly. Plan ahead and consider whether the asset's end-of-term value will cover the balloon.
Should You Use a Balloon Payment?
Reasons to use a balloon
- You need lower monthly repayments to manage cash flow
- You plan to sell or trade the asset before the balloon is due
- You're confident the asset will retain enough value to cover the balloon
- You want to preserve working capital for other investments
Reasons to avoid a balloon
- You plan to keep the asset long-term — paying more total interest isn't ideal
- The asset depreciates quickly (e.g., technology, some vehicles)
- You want to own the asset outright with no future obligations
- A lump sum at the end could strain your cash flow
Frequently Asked Questions
It depends on the contract. Check how extra repayments are applied, whether they change the balloon, whether funds can be accessed again and what early-payout costs or calculations apply.
There is no useful percentage that applies to every transaction. Model a no-balloon scenario and test any proposed balloon against expected asset value, total interest and the business's end-of-term cash flow.
Functionally, yes — both refer to a lump sum due at the end of the term. "Balloon" is typically used with chattel mortgages, while "residual value" is the term used with finance leases. The key difference is that finance lease residuals have ATO-mandated minimums.
See How Balloons Affect Your Repayments
Adjust balloon/residual values in our calculator and see the impact on monthly payments and total cost.
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