Bursting a balloon (payment)

Jamie entered into a lease agreement with a car finance company to buy a car. The total rental payments over the life of the lease were around $45,000. Jamie’s weekly payments were around $190, but there was to be what is known as a ‘balloon payment’ in 2017, at the end of the lease – one large payment of around $19,000. Usually, contracts that end with a balloon payment will either be refinanced or the car will be traded in.

However, Jamie said that he did not know about the balloon payment. He thought he only needed to make instalment payments until the loan was fully paid. He was not in a position to pay $19,000.

The car finance company told Jamie that the matter would be referred to its collection team. Jamie complained to FSCL



The car finance company noted that Jamie had signed all the loan documentation, which clearly set out that there would be a balloon payment as well as the date it would be due. It also pointed out that Jamie previously had a car finance lease agreement which included a balloon payment in 2014. When it came time to pay the previous balloon payment, Jamie could not pay it, so he then entered into the lease agreement he was now complaining about. (This was before new legislative requirements about responsible lending had come into force.)



We formed a preliminary view that Jamie’s complaint should be discontinued, and that the best option was for him to surrender his car. We agreed with the car finance company that Jamie must have been aware of the concept of a balloon payment because he had been subject to one before. We also agreed that Jamie should been aware of the requirement to pay a balloon payment, because he had signed the loan documentation to that effect.



After we told Jamie our preliminary view, Jamie notified us that a family member had agreed to pay the balloon payment to the car finance company. We facilitated an agreement between Jamie and the car finance company for the balloon payment to be made with no further consequences for Jamie.


Insights for consumers

After Jamie obtained his loan, new responsible lending provisions came into force, placing greater obligations on lenders to ensure borrowers can afford the loan and that they understand the documentation. However, it is still very important to make sure you know what you are signing up to when you borrow money.