If you cannot pay your balloon payment, you need to act quickly to ensure you find a suitable solution prior to the due date.
There are multiple finance options to consider. Either with your current lender, or refinancing to a new one to extend your repayment period.
However, if you default on your payment, your options may be limited, and you could even be forced into selling the car.
In this article, we will discuss all of your options when you cannot pay your balloon payment and detail which option is suitable for various circumstances.
Key Takeaways: Can’t Pay a Balloon Payment
| What if I Can’t Pay the Balloon? | Missing the final balloon payment counts as a default and can lead to eventual repossession. You must act before the due date. |
| Refinance the Balloon | You can apply for a new loan to pay off the balloon amount. This allows you to keep the car and pay it off in smaller installments. |
| Sell or Trade-in the Vehicle | If the car is worth more than the balloon amount, you could sell it. The proceeds can repay the lender, and go towards a deposit for your next car. |
| Extend with Current Lender | Some lenders allow a balloon extension, but this often comes with a higher interest rate than refinancing with a competitor. |
What Happens if you Don’t Pay a Balloon Payment
If you do not meet your balloon payment obligations and default, then you could have the car repossessed, and your credit history will be damaged.
A default listing will remain on your credit file for five years and can be very damaging to your finance prospects in the medium term.
You want to avoid this at all costs!
Even if you cannot afford to pay the balloon in cash, you can remain in control of the outcome by being proactive.
The following options are proactive steps that you can take to either repay the loan in full or seek an alternative form of finance.
Balloon Payment Options When You Can’t Afford It
Option 1: Sell or Trade-in the Car
Now that your car is a few years old it may be time for an upgrade. A lot of customers use a balloon payment with the intention of upgrading their car when it falls due.
That way they are consistently upgrading to a newer car, and never repaying the balloon amount.
If you are reading this article, we can assume this is not the case and you need a solution to an urgent problem!
You could maximise the sale price by managing it yourself through a private sale. This is a lot of hassle and you will have to advertise the car yourself.
As long as the value of the vehicle is more than the payout figure then no problem.
If you are looking to trade-in your car and upgrade your vehicle when speak to our team.
We often trade-in vehicles through our sister company Gusto Auto.
Option 2: Extend your loan term
The lowest friction option is to speak to your current lender about extending your loan term so that you can continue your current repayments until the balloon is covered.
This could be the most expensive option, as you may be able to get a better deal elsewhere.
If the lender allows you to extend via a balloon refinance extension, then it is a quick and easy solution.
Option 3: Refinance your car loan
Refinancing can be a smart strategy when you need to meet a balloon payment, need to keep your car, and also want the best possible financial outcome.
If you consider how your circumstances have changed since you took out the loan then you may be able to get a much better deal. Consider the following:
- The loan amount is smaller.
- Your earnings may have increased since you bought the car.
- Your credit score may have also increased.
If these are all true and the value of the car is well above the refinanced amount, then it could make sense to switch.
Get in touch with our team below for a free health check on your current loan. We will do the sums for you so that you know if there is a better deal available.
How Can I Refinance My Balloon Payment
You can refinance your balloon payment by applying for a loan with another lender for an amount that will close your existing car loan.
In some cases, you can refinance with the same lender if that is your preference, but generally speaking, you can get a better deal if you shop around.
Speak to a Broker Early
A broker can do the legwork for you with access to products from a large panel of lenders.
There are three elements that a good broker will do as part of an initial assessment:
- Assess where you are most likely to be approved.
- Find the best interest rates available from the lenders identified in step 1.
- Calculate the life of loan costs compared to staying with your current lender.
Only where there is a benefit to refinancing will that be the recommendation.
It is important that you start this process well before that balloon payment is due.
While we can turn around loan approvals very quickly in some circumstances, you will also be relying on your current lender to take the payment, close the loan, and remove their security interest in the vehicle.
This all takes time, so best to be organised and avoid any unnecessary stress or risk of default.
Apply for a New Loan
Once you’ve identified a suitable lender, the application process begins. The broker ill guide you through all additional documentation that is required to formalise a refinance application.
Lenders will assess your ability to repay the new loan, often with more scrutiny than when you first financed the vehicle.
If approved, your balloon will be paid out in full and replaced with a fresh repayment plan.
Potential Challenges to Refinancing a Balloon Payment
While people are often in a better situation when trying to refinance than when the took out the initial loan, this is not always the case.
Plus, you have a vehicle that is a bit older now, which will act as security for the loan.
Here are some potential issues to be weary of when trying to refinance your balloon payment.
Deterioration in Credit Score
If your credit score has taken a hit since you took out the original loan, refinancing could be more difficult or come with a higher interest rate.
If you have stayed up to date with your repayments on all of your loans, have not overused BNPL services, or started using payday loans then you should be fine.
A broker will check your credit score early in the process and if there is an issue it will be one of the first discussions to have.
There are lenders who may still refinance your balloon payment if you have bad credit, it is just going to be more expensive.
Change in Income and Expenses
Lenders are obligated to conduct serviceability checks under law to ensure you can meet the new repayments.
If your income has declined since your last application, and you cannot prove your capacity to repay, then the application could be declined.
Vehicle Age and Quality
Most lenders have strict criteria around the age and condition of the car being refinanced.
If your vehicle has high mileage, heavy wear and tear, or is older than 10 years, this could limit your ability to refinance.
Some lenders will also assess the car at the end of the proposed repayment term, and not the start. This often catches people out.
In some cases, the car may no longer qualify as suitable security for a new loan, especially if its value has dropped below the balloon amount.
Refinancing Costs and Fees to Consider
When assessing your options to refinance, it is critical to include the switching costs in the calculations.
If the net result is not an improvement, then you should just extend the loan term with your current lender (assuming that’s an option for your balloon payment).
There could be fees from your current lender and your new lender when setting up the loan.
Early Payment Fees
If your original loan agreement includes early payout penalties, refinancing could trigger additional charges.
You should contact your lender to get a payout figure prior to starting the refinance process. This will tell you if there is a charge above the current outstanding balance.
Establishment Fees on New Loan
New loans often come with setup or establishment fees, risk fees, and broker fees.
While these aren’t usually exorbitant, they add to the overall cost of refinancing and should be factored into your calculations when comparing options.
As part of your health check, our brokers will consider all fees when making a recommendation. A net saving is the task for a broker, or there is no point in proceeding.
Should You Use a Broker or Go Direct to a Lender?
If you cannot afford your balloon payment and want to keep your car, then you need to find an ongoing finance solution.
Here is a summary of where you are best placed.
When to go to the Current Lender
If your lender is happy to extend your repayment term, and you are not concerned about the overall cost, then your current lender will be the best fit.
This is the most convenient and frictionless option.
It may also be the best option if your credit score or earnings have deteriorated, which could make refinancing tough.
However, a broker can always provide an obligation-free consultation to ensure this is the correct decision.
When to go to a Broker
If you need ot extend your repayment term and want the cheapest possible finance option, then you need to shop around.
A broker can make a quick assessment and provide options without you having to do any of the legwork.
If your credit history has been stable, your earnings are improving, and the value of the car is decent, then you may be surprised what deals are on offer elsewhere.
While we are a broker ourselves, the fact is that if we cannot save you money, there is no point in refinancing through our services. So it is a win/win.
Submit an enquiry below to kick things off and our team will be in touch.
Start Planning 2-3 Months Out
If you cannot pay your balloon payment, then you need to take action as soon as possible.
A default could be catastrophic and limit your options to extend or refinance your car loan. Which could force you into a sale.
If you are considering an upgrade to your car then you could apply and be approved the same day if all goes smoothly.
But what if it doesn’t?
By giving yourself a few months you have time to fix any issues that may prevent you from getting a new loan before the balloon payment falls due.
And if all else fails, you have time to sell the vehicle privately and maximise the sale price to make the best of the situation.
