Balloon payment loans defer a portion of the loan for lower monthly repayments, but come with a significantly larger final instalment. Learn how balloon payments work, and who they are suitable for.
A balloon payment is a type of loan structure that defers repayment of a portion of the loan. The deferred portion only becomes due on the final instalment of the loan. Meanwhile, the borrower makes fixed instalment payments every month until the loan tenure is completed.
If this is the first time you’re hearing about balloon payment loans, well that’s not surprising. Turns out, balloon payment loans aren’t exactly the most popular.
Despite first being launched in Singapore more than 20 years ago, and then being relaunched in the wake of 2013 loan curbs, lenders have seen few takers for balloon payments.
Table of contents:
- How does a balloon payment work?
- Pros and cons of balloon payment
- Should you take up a balloon payment loan?
- Side note: What is PARF Rebate, ARF and OMV?
- Frequently Asked Questions (FAQs)
How does a balloon payment work?
Balloon payment loans work very similarly to regular instalment loans, where the total loan plus interest is paid off in fixed instalments over a stipulated number of months.
The difference with balloon payments is that a portion of the loan amount is deferred, and only repaid on the last instalment.
Meanwhile, the monthly instalment payments cover the rest of the loan. This includes interest charges, which is levied on the total sum borrowed.
Example of a balloon payment loan
Balloon payment loans are commonly offered as a form of car financing. Let’s take a look at how balloon payment works using an example car purchase.
In this scenario, the deferred portion of the loan would be the PARF rebate of the vehicle. This is a portion of the ARF, which is calculated based on the OMV of your vehicle.
If you’re not familiar with PARF Rebate, ARF and OMV, you can see a detailed explanation in a later section. For now, let’s proceed with our example with the following assumptions:
- Total purchase price of car: S$160,000
- Loan amount (60% LTV): S$96,000
- PARF Rebate (50%): S$20,000
|
Conventional car loan (flat rate) |
Balloon payment loan |
|
Interest rate: 2.8% p.a. Tenure: 5 years Total interest on loan (2.8% x S$96,000 x 5 years) = S$13,440 Total loan amount (S$96,000 + S$13,440) = S$109,440 Instalment per month (S$109,449/60) = S$1,824 Final instalment payment = S$1,824 |
Interest: 3.5% p.a. Tenure: 5 years Total interest on loan (3.5% x S$96,000 x 5 years) = S$16,800 Total loan amount (S$96,000 + S$16,800), minus PARF Rebate (S$20,000) = S$92,800 Instalment per month (S$92,800/60) = S$1,547 Final instalment payment (S$1,547 + S$20,000) = S$21,547 |
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Pros and cons of balloon payment
|
Pros |
Cons |
|
Makes it possible to lower monthly payments |
Interest is generally higher |
|
Defers a portion of the cost until much later |
Requires a significantly larger final instalment |
Because a balloon payment defers a portion of the cost, this essentially reduces the loan amount until the end of the loan.
As a result, borrowers can pay smaller amounts per instalment. This means balloon payment loans can help make an expensive purchase more affordable on a lower budget, or enable borrowers to purchase what they want without cutting back on their lifestyle.
On the flipside, interest charged on balloon payment loans are often higher than conventional loans. This means a higher cost of borrowing.
And more importantly, you will need the financial discipline to ensure you can meet the final payment, which is when the deferred amount becomes due.
Should you take up a balloon payment loan?
A balloon payment loan can be particularly tempting when considering a car purchase. It allows you to own a car with a smaller monthly cost, and may even allow you to purchase a larger car than otherwise possible.
However, balloon payments are not for everyone. Remember that you will face a substantial payment on the final instalment, which requires planning ahead.
The risk of balloon payments is if you’re unable to raise the needed amount, you may resort to taking another loan to pay off your balloon payment loan. This can lead to a dangerous cycle of borrowing that can be hard to break.
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Side note: What is PARF Rebate, ARF and OMV?
The PARF Rebate is part of the rebates granted when you deregister your vehicle. Here’s how much PARF rebate you will be granted according to the age of your car. Note that there’s a cap of S$60,000 for vehicles with COEs obtained in the second COE bidding exercise of Feb 2023.
|
Age of vehicle at deregistration |
PARF rebate |
|
Less than 5 years |
75% of ARF |
|
5 to 6 years |
70% of ARF |
|
6 to 7 years |
65% of ARF |
|
7 to 8 years |
60% of ARF |
|
8 to 9 years |
55% of ARF |
|
Above 9 years but less than 10 |
50% of ARF |
|
More than 10 years |
Nil |
ARF stands for Additional Registration Fee, and is a tier of tax levied for registering a car in Singapore. It is calculated based on the Open Market Value (OMV) of your vehicle, in the following manner:
| OMV | ARF (% of OMV to pay) |
| First S$20,000 | 100% |
|
Next S$20,000 (i.e. S$20,001 to S$40,000 |
140% |
|
Next S$20,000 (i.e. S$40,001 to S$60,000) |
190% |
|
Next S$20,000 (i.e. S$60,001 to S$80,000) |
250% |
| Above S$80,000 | 320% |
Finally, OMV is basically the price paid or payable when a vehicle is imported into Singapore. This figure is assessed by the Singapore Customs and includes purchase price, freight, insurance and all other charges incidental to the sale and delivery of the car to Singapore.
Frequently Asked Questions (FAQs)
Is balloon payment a good idea?Balloon payment can make a costly purchase more manageable, but requires discipline and planning ahead to properly pay off. This makes balloon payment loans unsuitable for those unable to cope with a lump-sum repayment.
What are the reasons to avoid balloon payments?Balloon payments often charge higher interest rates, which results in a higher cost of borrowing. Also, some borrowers may find it difficult to meet the final instalment, which becomes substantially larger due to the inclusion of the deferred amount.
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