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If you’re looking at getting car finance, you may come across some dealers or lenders that offer a balloon payment option. This type of car loan can help reduce your repayments but require you to make a large lump sum payment at the end of the loan term.
While a balloon payment can help save you money initially, it’s important to understand how they work before you take on a car loan that offers one.
A balloon payment is a single, lump sum payment that is made at the end of a loan term to cover the remaining cost of the loan. It is commonly found as part of dealer finance, but is also offered on some car loans. The balloon payment amount is only payable at the end of the loan, meaning it can help reduce the size of your regular repayments.
Balloon payments offer a number of advantages, including:
Before opting for a balloon payment at the end of your term, ask yourself the following:
John wants to borrow $18,000 for a car, with a loan term of 5 years. While this would normally mean he makes monthly payments of $300, plus interest, he chooses to include a balloon payment of $5,000. This means he only makes repayments on the remaining $13,000 (as well as interest on the entire loan amount), which works out to be $216.67 each month, plus interest.
Many dealerships make their money by refinancing balloon payments. If you’re coming to the end of your loan term and unable to pay your balloon payment outright, refinancing is an option to consider.
You should consider this as a new credit product and give it the same consideration as you would give before taking on any other loan. Remember that you don’t need to refinance with the same lender, so you should compare your refinancing options before you apply.
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