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Balloon Payments Explained

How balloon payments (residual values) work in asset finance — and whether you should use one.

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:

ScenarioMonthly PaymentTotal InterestBalloon 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 TermMinimum Residual
1 year65%
2 years45%
3 years30%
4 years20%
5 years15%

Chattel mortgages have no ATO-mandated minimum balloon. You can set the balloon anywhere from 0% upwards (subject to lender limits, typically 40–50% max).

What Happens at the End of the Term?

When your balloon payment comes due, you typically have several options:

  1. Pay it in cash — use savings or business profits to pay the lump sum
  2. Refinance it — take a new loan to cover the balloon, spreading it over more months
  3. Sell the asset — use the sale proceeds to pay the balloon (works well if the asset has retained value)
  4. 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 your lender. Some allow extra repayments that reduce the balloon or shorten the term; others have fixed payment structures. Ask your broker about the lender's policy before signing.

For chattel mortgages, 20–30% is common. For finance leases, the ATO minimum applies (e.g., 15% for a 5-year lease, 20% for 4 years). Many businesses match the balloon to the expected resale value of the asset.

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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