By the Loan Phone team Reviewed by Anthony Moncada, M.App.Fin, Cert IV Finance & Mortgage Broking
Quick Answer
Balloon payment equipment finance allows Australian businesses to defer a lump sum (residual payment) to loan term end, reducing monthly repayments by 20-50% depending on balloon size. Typical balloon amounts range from 20-50% of equipment value based on term length and lender policies. This structure reduces monthly cash flow requirements but increases total interest paid over the loan term. In 2025, equipment finance with balloon payments typically offers rates of 7-12% p.a. (indicative only) depending on equipment type, business strength, and loan structure. Modern comparison platforms can assess balloon payment options across 100+ lenders efficiently, with settlements possible within days for approved applications (subject to lender and circumstances).
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How Balloon Payments Work
Balloon payment (also called residual payment) equipment finance defers an agreed lump sum amount to final payment instead of paying off the full loan over the term. This reduces monthly repayments significantly but creates an obligation at term end.
Example: $100,000 Equipment Loan (5 Years, 8.5% p.a.)
| Standard Repayment (No Balloon) | ~$2,050 / month |
| Repayment with 30% Balloon ($30k) | ~$1,490 / month |
| Monthly Cash Flow Saving | ~$560 / month |
Monthly repayments drop approximately 27% with a 30% balloon, freeing $560 monthly for business operations. Total interest increases slightly due to larger outstanding balance throughout the term.
For comprehensive equipment finance structures, see our equipment finance options guide.
Typical Balloon Percentages
Balloon amounts are typically calculated as percentage of original equipment value, with maximum balloons varying by term length and lender policies.
Common balloon structures:
- 3-year terms: 30-50% balloons possible
- 5-year terms: 20-40% balloons typical
- 7-year terms: 10-30% balloons common
Lenders limit maximum balloons to ensure the amount doesn’t exceed expected equipment value at term end. Equipment depreciating rapidly may have lower maximum balloons than vehicles or machinery holding value well.
Critical requirement: Balloon amount must not exceed reasonable expected market value of equipment at term end. A $50,000 excavator may support a $15,000 balloon after 5 years, while rapidly depreciating technology might only support 10-15% balloons.
Benefits of Balloon Payments
- Lower monthly cash flow requirements: Reduced monthly repayments free working capital for business operations, inventory, or growth investments.
- Larger equipment acquisitions: Lower monthly costs may enable financing equipment otherwise outside budget constraints. A $150,000 truck becomes more affordable with $3,000 monthly repayments instead of $4,200.
- Flexibility at term end: Multiple options available when balloon falls due - refinance the balloon, pay it out, trade in equipment, or sell equipment and settle the loan.
- Tax deduction optimization: Under chattel mortgage structures, businesses may still claim full depreciation deductions on the entire equipment value despite the balloon payment (subject to tax advice - consult your accountant).
For chattel mortgage tax benefits, see our chattel mortgage guide.
Considerations with Balloon Payments
- Higher total interest costs: Because you’re paying off less principal each month, total interest paid over the loan term increases compared to no-balloon structures.
- End-of-term obligation: Balloon creates a defined obligation at term end requiring planning - either refinancing capacity, sale proceeds, or cash reserves to settle.
- Equipment value risk: If equipment value drops below balloon amount at term end, selling equipment to settle may leave shortfall requiring additional funds.
- Refinancing not guaranteed: While most businesses successfully refinance balloons, approval depends on business circumstances at term end. Plan for either refinancing or payment.
Balloon Payment Options at Term End
When balloon payment falls due, businesses typically choose one of four options:
- Refinance the balloon: Most common approach - take new finance for balloon amount, extending the term. Essentially starting a new loan for the balloon amount at current market rates.
- Pay out the balloon: If business has accumulated cash reserves or strong cash flow, paying the balloon clears the loan and provides unencumbered equipment ownership.
- Trade in the equipment: Dealers may accept equipment as trade-in toward newer equipment, with trade value covering balloon (if equipment value supports it) and potentially contributing toward new equipment deposit.
- Sell the equipment: Private sale of equipment with proceeds used to settle balloon payment. Any sale proceeds above balloon amount remain with the business.
Compare balloon financing options for various commercial equipment types across multiple lenders.
Who Should Consider Balloon Payments?
Balloon structures suit specific business circumstances and objectives:
- Growing businesses: Companies prioritizing cash flow for expansion may benefit from lower monthly commitments, using freed capital for growth investments.
- Seasonal operations: Businesses with irregular cash flow appreciate consistent lower monthly payments with balloon settled during high-revenue periods.
- Equipment upgrade plans: Businesses planning to upgrade or replace equipment before term end may structure balloon around upgrade timing.
- Short-term cash flow constraints: New or recovering businesses needing immediate equipment but facing temporary cash flow limitations benefit from lower monthly requirements.
Not suitable for: Businesses with tight cash flow unable to plan for balloon settlement, equipment depreciating rapidly beyond balloon amount, or operations requiring equipment ownership without ongoing obligations.
Frequently Asked Questions
What’s the maximum balloon percentage allowed? Varies by lender and term length, typically 20-50% depending on equipment type and term. Lenders limit balloons to reasonable expected equipment values at term end.
Can I change the balloon amount later? No, balloon amount is fixed at loan commencement. However, you can refinance the entire loan to restructure balloon amounts if circumstances change.
What if equipment is worth less than balloon at term end? If selling equipment to settle, you’re responsible for any shortfall between sale proceeds and balloon amount. This risk emphasizes importance of conservative balloon sizing relative to expected equipment value.
Speak with Specialists
Need expert guidance on your balloon payment equipment finance application? Email: loans@loanphone.com.au Website: www.loanphone.com.au
Related Resources
Explore these related guides for business owners and ABN holders:
Disclaimer: This article provides general information only and should not be relied upon as financial or tax advice. Rates, terms, and eligibility vary by lender and individual circumstances. Tax benefits are subject to your specific business structure and circumstances. Always seek independent professional advice from a qualified accountant and financial adviser before making financing decisions.
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Last updated: 2025-11-13