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Balloon payments can lower the monthly cost of your vehicle. But it won’t make your car loan any less expensive. And while some people might benefit, make sure you understand the risks — like going upside down or even having your car repossessed.
A car loan balloon payment is one large payment that’s due at the end of your loan following smaller monthly payments. Some car loans come with balloon payments to lower your initial monthly costs without lengthening the loan term. Balloon payments are also common on auto leases.
Although you may owe a large amount once your loan is up, balloon payments have their benefits that include:
Balloon payments might seem like a way to make your car loan more affordable, but that’s not always the case. Unless you have a lot of money coming in by the time the payment is due, you might be faced with a bill for hundreds or thousands of dollars which can be difficult to meet.
Can’t afford it? You might be forced to refinance your loan, which lengthens your term and hikes up the cost. And if refinancing isn’t an option, you could use your car.
While there are some benefits to having a balloon payment at the end of your car loan, consider some negative features before committing to a loan.
You can find out how much of a balloon payment by subtracting that payment from your total loan amount. Enter your new balance into our car loans calculator below to find out how much you will owe each month.
Ask yourself these questions if you’re on the fence about singing up for a car loan with a balloon payment at the end:
While your repayments are lower, working out how much the lowered repayments are costing you in additional interest over the loan term is a crucial step. Are the long-term costs worth the short-term savings?
Many people put money away in a savings account or end up putting the amount on a no-interest credit card. Whatever you decide, have a goal in mind for how you will manage the final payment.
A car’s value decreases over time. If the car’s value is worth more than your loan amount after three to five years, you might want to consider leasing the vehicle instead of buying — that way you can return it instead of paying more than its resale value.
Balloon payments are a gamble. If you’re thinking of using a balloon payment loan to buy your dream car, you might want to consider going for a less-expensive alternative while you save up. It just might not be worth the risk unless it’s the only option you can afford.
If you had a loan secured by your car, your lender could repossess the vehicle. If not, your lender might send your repayment to collections.
Either way, skipping out on your balloon payment will damage your credit and could make it difficult for you to get other types of financing — and even sometimes affect future employment opportunities.
The most common way to get out of a balloon payment is to refinance with another lender. You’ll still have to pay off that amount, but it’ll break it up into more manageable repayments.
Refinancing essentially allows you to extend your loan term so you can pay off your car loan with low repayments the whole time.
Many dealerships make their money by refinancing balloon payments. If you’re coming to the end of your loan term and are unable to pay your balloon payment outright, auto refinancing could be a good option.
Take your time reviewing your options and making a final decision. You don’t need to refinance with the same lender, and the terms of a refinanced loan should benefit your financial needs.
Car loans with balloon payments can help keep your monthly payments low, but they do leave you with a large payment to deal with at the end of your loan. Keep your financing options open and consider other car loans before you decide.
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