September 23, 2018

Why Balloon Payment on a Car Loan Makes a Difference

When choosing a car loan, one of the most important decisions borrowers are faced with is whether or not they should add a “Balloon Payment” to the loan? The size of the Balloon Payment will have an effect on the amount of your monthly repayments as well as the amount you will owe once the loan has expired. Keep reading to find out what difference the Balloon Payment makes on your car loan rates.

What is a Balloon Payment?

A Balloon Payment is a lump sum that the borrower owes to the financer at the end of the loan. This affords the borrower the opportunity to pay a portion of the principal of the loan during the term. This means that they pay a reduced monthly payment and then owe a larger sum at the end of the loan agreement.

The amount of the payment can be represented as a percentage of the amount borrowed or as an absolute dollar value. Other than a lease, this type of payment plan is optional.

Balloon Payment Benefits

The main benefit of a Balloon Payment is that you will have a low monthly payment. This can have the added benefits of qualifying for a larger car loan amount and helping to manage finances.

What is the process when the payment is due?

The payment must be made as a lump sum once the car loan has expired. There are typically a number of options available once the payment is due.

  • If the borrower wants a new vehicle, they can sell the car and use the money to make the payment and finalise the loan. The borrower is then entitled to buy a replacement car and if they wish, apply for a new car loan to pay for the replacement vehicle. If the car is being traded in as a part of the payment for the new vehicle then the Balloon Payment can be included in this process.
  • If the borrower wants to keep the vehicle, they can make the payment in cash, roll over or refinance the payment into another loan.

Final thought

There are so many different car loans that it can be difficult to decide which one is best for you. It is a good idea to speak to a financial advisor who will be able to explain loan terms and conditions, help to compare car loans and provide you with the best solution for your financial circumstances.

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