When it comes to types of car finance, the possibilities are (almost) endless.
If you’ve been doing your research, you’ve probably come across Hire Purchase (HP). It’s one of the most popular ways to finance a new or used car after all.
But have you heard of HP with a balloon payment?
This twist on a typical HP deal can offer all the perks of this agreement type – spreading the cost of your new wheels, eventually becoming its legal owner, and having no mileage restrictions to worry about – but with the added bonus of lower monthly repayments.
Of course, it’s not the best option for everyone and it’s worth noting that it’s extremely uncommon to find lenders that offer this sort of HP agreement. With this in mind let us explain the ins and outs of HP with balloon so you can make the right choice for you.
While they might sound more suited to a child’s birthday party than a car finance agreement, balloon payments are quite common, especially if you opt for a Personal Contract Purchase (PCP) deal.
Balloon payment is the term used to describe the portion of your car’s value that is due to be paid when your loan comes to an end.
Depending on the length of your agreement and the car’s purchase price, your balloon payment could be several thousand pounds.
In a nutshell, HP with a balloon payment is a type of finance that lets you spread the cost of your new wheels over time.
You’ll pay a portion of the loan back in fixed monthly instalments and, when the agreement comes to an end, you’ll need to pay the remainder – the balloon payment – to become the car’s legal owner. Depending on the lender’s terms, you’ll usually be able to decide exactly how much of the car’s value you’d like to defer as a balloon payment.
HP loans typically last between one and six years. Your wheels will be secured against the loan during this time, meaning you won’t be able to sell or modify them (no personalised paintwork or turbo stereos, sorry).
In most HP deals, you’ll finance the full purchase price of your new pride and joy, minus any deposit that you put down upfront.
Once you’ve made all your repayments, you’ll have a small Option to Purchase admin fee to cover (usually around £200) and then the car will be legally all yours.
While you don’t have to worry about having a large balloon payment at the end of your agreement, standard HP finance can have higher repayments as you’re working towards car ownership.
HP with balloon, on the other hand, defers some of the car’s value to the end of your agreement so can reduce the amount you need to pay each month.
One of the big perks of choosing PCP finance is that you have options at the end of your agreement. That’s right, what happens next is completely up to you.
You’ll have three options to choose from:
But with HP with balloon, there’s only one route forward: you have to pay the outstanding amount!
Depreciation is also a point of difference. When you’re working out the details of your PCP agreement, the lender will use a whole host of factors to make a value prediction. Channelling their inner Mystic Meg, they’ll predict exactly how much the car will be worth once your agreement ends. This figure will then get locked in and become the Guaranteed Minimum Future Value (GMFV).
Of course, lenders don’t actually have access to a crystal ball (as far as we know) and their predictions won’t always be accurate. The market might shift, trends could change, and your car could end up being worth more or less than they thought.
With PCP, this doesn’t matter – your GMFV won’t change – but this guarantee doesn’t apply with HP with balloon, so you run the risk of paying for outstanding finance that’s more than your car is worth. Or you could be in luck and end up with a balloon payment that’s less than your car’s real value which could be an added bonus!
Whether you’re already planning your next long-distance road trip or you have a lengthy daily commute, you’ll be pleased to learn that HP agreements don’t usually come with mileage restrictions.
Even so, you might still want to keep an eye on the number of miles you put on the clock. Mileage is one of the factors that can impact your car’s value, so if you plan on reselling or trading in your pride and joy once the agreement ends, you could get a better deal if you’ve been disciplined with your distance.