What is a balloon payment on a car lease, and should I choose one?

A balloon payment is a larger-than-normal payment due at the end of a lease or loan.

Similar to an actual balloon, your payment at the end of your lease or loan becomes “inflated” — sometimes by more than two times the loan’s average monthly payment.

Loans that have balloon payments are often referred to as balloon loans, and they’re usually associated with mortgages or car loans. In this article, we’re going to talk about balloon payments as they relate to car leases.

Balloon leases are somewhat rare, and we think there are better options to consider in most cases. But let’s review the details of balloon leases so you can decide for yourself.

• Should I choose a balloon payment on a car lease?
• How do I get a balloon lease on a car?
• What happens if I can’t afford a balloon payment?

Should I choose a balloon payment on a car lease?

You might be asking yourself, “Why would I want a balloon payment on a car lease?”

When you lease a car, you’re essentially paying for two things: the predicted depreciation of the vehicle and a rental charge, including taxes and fees. These costs can add up. By shifting part of the cost of a car lease to a balloon payment, you could potentially reduce your monthly payment amount.

So if reducing your monthly payments during the leasing period is an option — why not take it? Because there’s a significant tradeoff for that flexibility: a larger (potentially much larger) payment later. And though it might seem like a good idea now, it’s not always easy to make a big payment at the end of your lease. Even if you have a solid plan to save up the money to pay for the balloon payment at the end of your lease, life happens.

That’s why agreeing to a balloon payment can be a long-term risk, despite the obvious benefit of paying less throughout the lease term.

It’s also worth noting that repair and maintenance costs could start piling up toward the end of your lease as the car gets older. Depending on your lease agreement, you may be on the hook for some or all of these costs, which could make it even harder to come up with the amount needed for a large balloon payment at the end of your lease.

How do I get a balloon lease on a car?

If your leasing company offers it and you opt for a balloon lease, you may be able to negotiate the amount of your final payment upfront. And if you’re able to negotiate the residual value (the anticipated end-of-lease value) of your car before you sign the lease contract, it will impact the total amount due (minus any excess fees) for the balloon payment.

As with any negotiation, you have to consider the tradeoffs. In the case of a car lease, a balloon payment can get you a lower down payment and lower monthly payments — with the tradeoff being a higher payment due at the end of the lease. It’s not a question of saving money — it’s about choosing when to pay most of the amount owed.

With that in mind, make sure you have a plan (and even a backup plan) to make the balloon payment at the end of your lease. It may be best to avoid a large balloon payment if you don’t have a bulletproof plan to pay for it when your lease term comes to a close.

We’ve been talking about balloon payments as they apply to a closed-end-lease, but it’s worth noting that you may find the term “balloon payment” used with an open-end car lease. In this case, it’s referring to a payment needed to make up the difference if your estimated residual value and actual residual value on the vehicle don’t match up at lease end.

What happens if I can’t afford a balloon payment?

Let’s talk about the worst-case scenario: You opt for a balloon lease but can’t afford the balloon payment when it comes due. Before sweating too much, know that you may have several different options. Here are a few.

• Consider applying for a lease buyout loan. If you’re at the end of your lease and have the option to buy your car, this loan might help provide the extra financing you need. A lease buyout loan works like a traditional car loan and is offered by select banks, credit unions and online lenders. The downside (or upside, depending on your point of view) is that you’re committed to the vehicle.
• Consider rolling over the balloon payment due into a new car lease. While this option may sound more appealing if you prefer leasing to owning, you’ll likely end up with a higher monthly payment. Additionally, you may be responsible for any early-termination fees associated with ending your original lease early in order to finance the balloon payment through a new lease. (Also take note that it’s not necessarily available to you — it’ll depend on your lender.)
• Consider paying with a credit card — but understand the risks. If you’d rather avoid taking out an auto loan, making the balloon payment with a credit card may be an option. Keep in mind though that if you go that route, you could end up taking on more debt.

The federal government has put some limits in place when it comes to what consumers owe at the end of a lease. In some cases, lease companies can’t charge you more than three times your normal monthly payment. Make sure to read the fine print of your agreement, so you know exactly what your leasing company can charge you at the end of your lease. 

Balloon payments: Pros and cons

A balloon payment lease has one major benefit, but the drawbacks might be too many to offset it. You’ll have to decide if the risk is worth it.

Next steps

If you’re looking for lower monthly payments on a car lease, a balloon payment option might work for you. But we don’t recommend it. The potential to get deeper into debt is significant.

But if you want to go ahead with a balloon payment option, make sure that you have a solid plan for making the final payment and that you’re not on the road to taking on more debt at the end of your car lease.

Keep in mind that the overall cost of a new- or used-car loan — for a car you intend to keep longer term — might be more affordable than the cost of a lease with a balloon option.