Balloon payment
Balloons are common on UK asset finance — particularly for commercial vehicles, plant and certain types of equipment — because they let the borrower align the repayment profile with the expected residual value of the asset. Rather than amortising the full purchase price over the term, the borrower amortises only down to the projected residual value, and pays (or refinances) the residual as a balloon at the end.
The benefit is materially lower monthly instalments compared with a fully amortising loan of the same term. The trade-off is that the borrower needs a plan for the balloon: paying it in cash, refinancing it into a new facility, or selling the asset and using the proceeds to settle the balloon. If the asset's actual market value at maturity is below the balloon, the borrower has a shortfall to fund from other sources.
Balloon payments are usually set conservatively against forecast residual values, but they are still an assumption. UK lenders normally cap the balloon at a percentage of the original purchase price — often 30 to 50 per cent — to keep some equity in the deal and reduce the chance of negative equity at maturity.
Worked example
How the numbers play out
A haulage business buys a £90,000 tractor unit on a five-year hire purchase agreement with a £25,000 balloon. Monthly repayments are lower than a fully amortising deal — roughly £1,300 against £1,650 — and at month 60 the business either pays the £25,000 in cash, refinances it, or sells the unit and clears the balance.
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