Balloon payment due? How to refinance it, and your other options

When a balloon payment is due, the full amount is payable after your last regular repayment. You can pay it from cash, sell or trade the asset, or refinance the balloon over a new term. Lenders will usually refinance a balloon as it falls due, subject to assessment. Talk to us a few months before it falls due.

A balloon is a normal part of many business equipment and vehicle contracts. It keeps your regular repayments lower, and at the end of the term you decide what to do with the lump sum. This guide walks through your options for a work ute, truck, tipper, excavator, forklift or other business asset, so you can plan rather than scramble.

What happens when a balloon payment is due

A balloon (sometimes called a final payment or, on a lease, a residual) is the scheduled amount left owing at the end of your finance term. It isn't a penalty or a sign that something has gone wrong. You agreed to it when the contract started, in exchange for lower repayments along the way.

How it works depends on your contract:

• Chattel mortgage: you own the asset from the start, and the balloon is the last amount owing on the loan.
• Hire purchase: ownership passes to you once the balloon is paid.
• Lease: the end amount is called a residual (more on that below).

Start by checking your contract for the balloon amount and the due date, then ask your current financier for a dated payout figure. That figure is what any of the options below will need to cover.

Your four options at a glance

If your contract is a lease

On a lease, the end amount is called a residual and has GST added. Refinancing it works in a similar way. Plenty of business owners call a lease residual a balloon, so if that's you, the rest of this guide still applies.

How refinancing a balloon works

When you refinance a balloon, a new finance contract pays your current financier the payout figure, and you keep the asset and spread the amount over a new term. Your business keeps working with the same gear, and you avoid a large one-off hit to cashflow.

Refinancing a balloon is an ordinary finance product. Lenders refinance balloons as they fall due all the time, and it isn't treated as a rescue. Every application is still subject to the lender's assessment. In general terms, lenders look at:

• the age and condition of the asset
• how the asset is used in your business
• your repayment history on the current contract
• whether the business is still trading.

Each lender weighs these differently, which is where a broker can help. We work across a panel of lenders, so we can tell you which are likely to suit your asset and your business before you apply. See Equipment Finance Broker vs Bank for more on how that works.

What a 30% balloon does to your repayments

A balloon lowers your regular repayments in exchange for a lump sum at the end, which you can then pay, refinance or trade. Here's an example for a work ute costing $77,000 including GST, financed in full over 60 months with payments in advance.

Indicative example only. Actual repayments depend on the lender and your circumstances.

With payments in advance, you make 60 monthly payments starting at settlement, and the balloon is due at the end of the term, one month after the last regular payment.

In this example, the balloon frees up a little over $300 a month during the term. The trade-off is the $23,100 due at the end, which is why it pays to plan for it early. GST and tax treatment depend on your situation; check with your accountant.

Refinance or replace?

Refinancing makes sense when the asset still does the job well. Replacing it may make more sense when it doesn't. A few things to weigh up:

• Age of the asset. Lenders have their own limits on how old an asset can be at the end of the term, so older assets may have fewer options.
• Repair and running costs. If maintenance bills and downtime are climbing, refinancing locks you into an asset that may cost more each year.
• Earning power. A newer ute, truck or machine may let you take on more work, run more reliably or meet site requirements.

If you're leaning towards replacing, some lenders offer a streamlined path for businesses upgrading equipment they already finance. Our article on replacement equipment finance covers how that works.

When to start

Talk to us a few months before it falls due. That gives you time to work through the steps without pressure:

1. Get a dated payout figure from your current financier.
2. Decide whether you'll keep the asset or replace it.
3. Arrange the payout, refinance or replacement so it settles before the due date.

Leaving it to the last week narrows your choices. Starting early means you can compare options calmly and pick the one that suits your business.

What you'll usually need

• your ABN and business details
• asset details, such as rego, VIN or serial number
• the payout letter from your current financier
• identification for the business owners or directors.

Established businesses may not need to provide financials. Eligible businesses can often skip the tax returns and financial statements, depending on the deal. Our No-Financials Quick Assessment gives you a quick read on whether that's likely for you.

Balloons in North, Far North and Central Queensland

Across regional Queensland, balloons are common on the assets that keep businesses moving: work utes and 4WDs, tippers and trailers, and earthmoving gear such as excavators and backhoes. Whether you're running a trade business, a transport operation or a farm, the same options apply. We help businesses in North Queensland, Far North Queensland and Central Queensland, as well as Australia-wide.

Frequently asked questions

Talk to us about your balloon

If you have a balloon coming up, talk to us a few months before it falls due. Start with our No-Financials Quick Assessment for a quick eligibility check, and we'll take it from there. Finance is for business or commercial use only.