Balloon Payments in Trailer Finance: Pros and Cons
A balloon, also called a residual, is a lump sum left owing at the end of your loan. It lowers your regular repayments, but you need a plan for paying it.
How a balloon works
Instead of paying the loan down to zero over the term, you pay it down to an agreed amount, the balloon, which is due as a single payment at the end. Because you're repaying less of the principal during the term, your regular repayments are lower.
What it does to the numbers
An illustration on a $60,000 trailer over five years at 8.5% per year, with fees not included:
| Balloon | Monthly repayment | Lump sum at end | Total interest |
|---|---|---|---|
| None | about $1,231 | $0 | about $13,900 |
| 20% | about $1,070 | $12,000 | about $16,200 |
| 30% | about $989 | $18,000 | about $17,400 |
The 30% balloon saves about $240 a month but costs about $3,500 more in interest, because you're paying interest on the balloon amount for the full five years.
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Send an Enquiry →When a balloon makes sense
- You need low repayments now to protect cash flow, such as in a new business or a seasonal operation.
- The trailer will still be worth more than the balloon at the end, so selling or trading it in covers the lump sum.
- You plan to upgrade at the end of the term anyway.
The risks
- The lump sum is real. If you haven't planned for it, you'll need to refinance it, which means another application and more interest.
- Negative equity. If the trailer is worth less than the balloon at the end, selling it won't cover what you owe.
- Higher total cost, as shown above.
Rule of thumb: set the balloon at or below what you realistically expect the trailer to be worth at the end of the term, not just at the level that gets the repayment you want.
Balloons on personal trailer loans
Some consumer lenders offer balloons, but they're less common and more tightly assessed. The lender must be satisfied that the loan is suitable for you, including how you'll pay the balloon.
Model different balloons in the repayment calculator.