Many opt to apply for a car loan to buy a car, and when you compare car loans to get the best deal, it is essential to weigh the pros and cons of several factors including the option to have a residual value or a balloon payment on the loan. Should you select this option, how much should it be? Read on to know more about the balloon payment:
What is a Balloon Payment?
This refers to the lump sum that is owed to the financial institute at the end of a car loan term, after making all the regular monthly repayments.
Also called a residual value, a balloon payment refers to the lump sum that is owed to the financial institute at the end of a car loan term, after making all the regular monthly repayments. It enables you, as a borrower, to pay only a portion of the principal loan amount throughout the agreed term. Having a balloon payment lowers your monthly repayments in exchange for paying a lump sum when the loan term ends.
To illustrate: If you borrow $10,000 that will be paid for five years, and you agree to have a balloon payment of 10% ($1,000), you will make lower repayments on a monthly basis. After five years, you will pay the lender $1,000.
Having a balloon payment for your car loan is optional, but should you wish to have this option, here are some tips to consider:
Compare car loans
The balloon payment will enable you to get the car that you want since it will reduce your monthly repayments. Take note, however, that in most cases, it can be a huge amount as it is based off a percentage of the purchase amount. Check the car loan rates so you can choose the right loan.
Know the interest involved
Taking out a balloon payment can mean a higher amount of interest payable throughout the loan term. This will also increase the amount of interest to be paid per repayment. In other words, if you apply for a loan that comes with a balloon payment, a bigger portion of your outgoing cash flow can be tax deductible.
Make additional monthly repayments
Do you receive additional income such as bonuses? You can use these to add more repayments towards the residual value.
Upgrade your car
Having a balloon payment also enables you to keep your monthly repayments lower and update the amount of the balloon payment to the estimated value of the car when the loan term ends. Some people trade their car in after making the balloon payment. Then they apply for a car loan for their next car with a balloon payment again.
Got other tips on balloon payment and how to compare car loans? Share your car loan comparison ideas in the comments section.