Balloon Payment

A balloon payment is a final, larger-than-normal payment at the end of a finance agreement. It is common in hire purchase and personal contract purchase (PCP) arrangements for vehicles and equipment. The presence of a balloon reduces the monthly repayment during the term but requires a significant lump sum at the end.

Businesses that use balloon payments typically plan one of three outcomes: pay the balloon from business cash flow, refinance the balloon into a new agreement, or sell the asset and use the proceeds to cover it. The risk is that asset values can fall below the balloon amount, creating a shortfall.

Always check your hire purchase agreement carefully for a balloon payment. If your preference is to own the asset outright at the end of the term with no large final payment, ensure the agreement is structured as a straightforward HP with equal monthly instalments.

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