What Is a Balloon Payment on a Caravan Loan?

When you take out a traditional caravan loan, you usually make regular payments until the loan is finished. Over the course of the loan, these payments cover the money you borrowed and its interest. However, this isn't the only type of loan available to help you buy a caravan, and you may have come across loans that have balloon payments built into their schedule. How do these loans work, and are they a good option?

What Are Balloon Payment Loans?

Loans that have a balloon payment work in much the same way as regular caravan loans in that you commit to making repayments to a schedule during the time that the loan is in place. Your payments don't, however, cover all the costs of your borrowing, and you need to make a larger lump sum repayment—the balloon payment—at the end of the loan to settle it in full.

What Are the Advantages of Balloon Payments?

The regular repayments on a balloon payment loan are lower than those that come with other types of financing. When you agree to a final balloon payment, you remove some of your borrowing from your regular repayment calculation. This reduces the amount used to work out your loan repayments, allowing you to pay less over the term of the loan. To close the loan, you simply make the final balloon payment.

Is a Balloon Payment Right For You?

While lower regular repayments may look attractive, you should only look at loans with a balloon payment if you are confident that you can cover the final cost. If you can't do this, you may need to refinance, or your caravan may be repossessed. So, for example, this kind of caravan financing may be a good fit in the following circumstances:

  • You already have enough money to make the balloon payment but would prefer to keep this money earning interest for you in a saving account until the last minute.
  • You're a regular saver and can save enough cash during the loan's term to meet the final lump sum payment.
  • You know that you are coming into some money in the near future that will cover the balloon payment.

To get more advice on whether a balloon payment loan is the best option for you, talk to companies that offer caravan loans. They will be able to talk you through the pros and cons of this kind of financing and to give you advice on other options if you need it.