A balloon payment is a one-off lump sum that you agree to pay your lender at the end of your car loan’s term. In exchange for owing a lump sum at the end of your loan, you are only required to pay interest on part of the principle. Because balloon payments will typically account for a large proportion of your car loan’s balance, they can reduce your loan repayments.

It is called a “balloon” because it is very inflated compared to your other payments. The payment can be up to 50% of the car’s purchase price, depending on the length of loan term and other factors.