You may have heard the term balloon payment when it comes to buying a car. As odd as it may sound, it has nothing to do with inflatable party novelties! This loan option would seem like a good choice for affordable repayments, but there are some drawbacks that you should know about before committing yourself. Let’s see what it means and how it affects you in making a loan payment.
So, what is a balloon payment?
A balloon payment refers to a lump sum that you pay off at the end of your loan term. It is a significantly larger amount to pay than what your usual monthly repayments, in order to keep your regular payments more affordable by reducing their amounts. This option is found mostly with car dealers rather than any other non-bank institutions, and the balloon payment will be a set percentage of the total loan to pay at the end. By making your monthly repayments lower, a balloon payment is able to make it fit into your budget better, particularly if you struggle with the regular monthly car payments.
What are the other benefits of balloon payments?
The primary advantage of a balloon payment is the financial affordability in your regular payments, thus making it easier to fit into your monthly budget. With the extra cash set aside every month, you can put more into investing or towards any other more important expenses. Due to the nature of the balloon payment, you gain time and are able to build up your cash for the big pay off at the end of the term. You can also sell the vehicle and use it to pay for the balloon payment if you need to.
Some of the disadvantages of balloon payments
With careful and meticulous financial planning, balloon payments can work out strongly in your favour. It doesn’t suit every circumstance, however, and every financial need is unique from one another. Remember that you are required to pay in a lump sum at the end of your loan term. If this doesn’t suit your financial situation then the loan is not right for you. Another point to consider is that your interest will bloat over the course of the loan term. You are essentially paying the interest for most of the amount, and just a portion towards your debt amount. You’ll also need to be aware that refinancing is difficult if you were to choose this type of loan, because many can fall into a hardship due to the large sum of money to pay off the loan at the end of the term as agreed upon.
What happens when the loan term is up?
The loan agreement requires you to pay off whatever is remaining in full and in cash. You may also be able to sell the vehicle and put the money towards the loan. Selling could be a good option if you’re looking to upgrade anyway for a newer model. When you do, please keep in mind that the resell value needs to be higher than the amount you’re still paying off, so you can truly benefit from doing so.
The bottom line
Applying for a balloon payment to your car loan, whether for personal or business use, is advantageous in lowering your monthly repayment. However, the cost of the loan can be significantly higher in the long run, and also you end up with a higher bill to pay at the end of the loan term.
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