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What is a Car Balloon Payment and How Does It Work? | LendingTree

A balloon payment on a car is a final lump sum paid at the end of a loan term that is greater than previous payments. A balloon car loan could be a good option for those looking for lower monthly payments, similar to a car lease, but with the rights of ownership. It can be a good idea if you absolutely know you’ll be able to cover the balloon payment, but it can be risky if you don’t have a plan to pay such a large amount.

what is a balloon payment on a car loan?

Global auto loans are most commonly offered by vehicle manufacturers, but banks, credit unions, and other financial institutions may also offer them. You can also find balloon loans for home mortgages and commercial purposes, such as commercial mortgages and equipment financing. A balloon payment on a car loan shares some similarities with a lease in that there are lower monthly payments and a residual value at the end of the term, but there are also some key differences.

Reading: What is balloon payment on a car

In the case of a balloon car loan, the lender sets a schedule of smaller monthly payments that lead to the balloon payment, also called a balloon payment. this amount is usually in the thousands or even tens of thousands of dollars, often around half the value of the car. A balloon car loan may make sense if you’re looking for a lower monthly payment and have a plan for how you’ll handle the large balloon payment at the end of the loan.

example

Here is an example of a balloon loan compared to a traditional loan. Jane Smith is deciding between a 36-month balloon loan and a 60-month traditional auto loan for a new car costing $42,950. In both cases, Jane makes the same 10% down payment and finances the same amount, but that’s where the similarities end. we’ll discuss the differences in apr, finance charges, and payments below.

apr

Because balloon loans tend to be riskier, the annual interest rate on a balloon auto loan is typically slightly higher than a traditional auto loan. therefore, finance charges will also be slightly higher.

number of payments

The balloon payment may be due as a final payment within the term of the loan, or as a payoff after the term of the loan ends.

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For example, on a 36-month loan, the balloon payment could be the 36th payment or the 37th payment after the full three-year term, depending on your contract. you may be able to find a longer or shorter term.

monthly payments

Lower monthly payments are the biggest advantage of balloon loans, but that doesn’t mean you’re paying less overall; it’s just a different way of structuring the loan.

balloon payment

This amount is established prior to signing the loan agreement and is determined by the lump sum factor, which is the estimated percentage of the vehicle’s value at the end of the loan term. For example, if a new car is worth $24,000 now and will have an estimated value of $15,000 three years from now, then the balloon factor is 62.5%.

global loans vs. leases

Bundle loans are a kind of compromise between leasing a car and traditional financing. Like leasing, balloon loans come with lower monthly payments, but they can get complicated, especially if you’re not prepared to make that final payment. leases typically offer the lowest monthly payments, followed by balloon loans, then traditional loans. so if all you care about is the lowest possible monthly payment, you may want to consider leasing a vehicle.

One big difference between a balloon loan and a lease is car ownership. With a lease, the dealer will own the car for the entire lease period, but may have the option to purchase the vehicle at the end of the lease. With a balloon loan, just like with traditional financing, you will own the car when the loan is paid in full. Because of this, a balloon loan typically does not include mileage or other restrictions that are common when leasing a car.

pros and cons of a balloon payment loan

If you’re looking for a lower monthly payment but don’t want to lease a car, you may want to consider a balloon payment loan. however, it is important that you have a plan to pay off the loan when it is due at the end of the loan term.

pros of balloon payment auto loans

lower monthly payments: what’s wrong with that? If cash is tight, a balloon loan gives you the lower payments of a lease but the rights of ownership. Even if cash isn’t tight, small payments allow you to invest that cash in something with high returns, then turn around and apply those returns to the balloon payment.

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buy time: If you don’t have the money to pay off your car loan right now but you’re sure you’ll have it at the end of the term, a balloon loan might be a good idea. Since you’ll know how much your balloon payment will be when you sign your loan paperwork, you’ll know how much you need to save for that final payment. meanwhile, those saved funds can earn interest instead of going to a lender.

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Disadvantages of Balloon Payment Auto Loans

Large payment at the end of the loan: Unless you have excellent budgeting skills or a unique financial situation, you may find yourself in an awkward position at the end of the loan. Before you get a balloon car loan, make sure you have a plan for how you’ll handle the balloon payment at the end of the loan.

Danger of being upside down: Since you’ll be making smaller monthly payments, you may not be able to keep up with the depreciation on your car. this could mean that you owe more than the car is worth, which is called being backwards on your loan. by the time the balloon payment is due, you may have to pay more money than the car is worth or walk away from the car and risk damaging your credit.

Higher interest rates and fees: Since global auto loans are generally riskier than traditional financing, they often come with higher interest rates and fees. That’s something to consider when deciding how you want to finance your next car. Even if your monthly payment is lower, you could be paying more over the life of the loan.

options at the end of a balloon loan

If you’re worried about covering the big balloon payment, it’s important to understand your options at the end of a balloon loan. Here are some of your options when your balloon payment is due.

  • Pay the balloon payment in cash: The simplest method (if you have the money) is to simply pay the balloon payment to your lender. then you will own your car outright.
  • sell the car: you could sell the car for enough to cover the amount you owe. If you financed your car through the manufacturer, you may have the option to resell it, though you may be responsible for excess use, mileage, and disposal charges. depending on the value of the car and the amount of the settlement, you may walk away with some money in your pocket or have to cover the rest out of pocket.
  • trade in the car: Another option is to trade in your car and use the proceeds to purchase a new car. You will be responsible for any shortfall in the value of the car, depending on how much you get for your car. your lender may offer you the opportunity to include any shortfalls in your new loan, but that would almost certainly guarantee that you will be upside down on your new loan.
  • return the vehicle: similar to sell your car or trade it in, you may be able to return the vehicle to the dealer where you bought it. This usually only works if you also plan to buy or lease a new car from this same dealer.
  • Consider refinancing: When refinancing your balloon car loan, a new lender You put a lien on the vehicle and pay off the old lender, giving you the ability to pay off the car over time. Be sure to run the numbers to determine if refinancing your balloon loan makes financial sense.
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balloon payment loan: frequently asked questions

Are balloon payment loans a good idea?

If you don’t have the money to put down right now but you’re sure you’ll have the funds in a few years, a balloon payment loan may make sense. These loans combine the low monthly payments of a lease with actual car ownership. but they come with risks: if you can’t make the balloon payment at the end of the loan, you’ll find yourself in a difficult financial situation.

what if I can’t pay the lump sum payment?

If you can’t afford the balloon payment at the end of your car loan, you have a few options, but none are ideal. You can try to sell your car to apply the proceeds to the balance you owe. If you’re looking to buy a new or used car from the same dealer, they may allow you to return or trade in your car and apply the proceeds to your new loan. Another option to consider is refinancing your balloon payment with a new loan.

what is a typical balloon payment?

Just like the residual value on a car lease, the balloon payment at the end of a car loan depends on a few different factors. To get a rough idea, you can take the purchase price of the car plus any applicable taxes and fees, and subtract any down payment or principal amount you’ll pay over the course of the loan. the remaining amount will be your balloon payment, which will likely be in the thousands or tens of thousands of dollars. Fortunately, your lender will disclose your balloon payment amount before you sign on the dotted line.

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