What is a Balloon Payment?

Alevin Chan

Alevin Chan

Last updated 06 May, 2024

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?

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 



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. 

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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


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


Next S$20,000

(i.e. S$40,001 to S$60,000)


Next S$20,000

(i.e. S$60,001 to S$80,000)

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.

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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. 


Read these next:

How to Calculate Loan Repayments

The Real Cost: Deferring Your Personal Loan Payment

What Happens If: You Skip Credit Card Bills, Loan & BNPL Payments

Is S$0 Down Payment Car Purchase A Good Idea?

What Is Debt Repayment Scheme And How To Apply For It?

Best Personal Loans To Ease Your Cash Flow In Singapore (2024)

An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.


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