October 21, 2017

Balloon Payment Explained

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:

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. 

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How to Get Pre-approved for a Car Loan

If you’re planning to buy a new car, you may have heard of the term pre-approved car loan. This setup offers a lot of benefits. First of all, you will have an idea of what you can afford. Since your financial capacity will be assessed beforehand, you will know how much you can borrow as well as your repayments and car loan rates. Also, it will give you the upper hand when choosing a car and negotiating a deal. By knowing how much you can afford, you can use this as leverage when it comes to discussing the sales price.

How to Get Pre-approved for a Car Loan

Shop around

When planning to make a major purchase through a loan, make sure to do your research. This holds true when buying a car. With so many brokers offering a wide range of services, it is best to compare car loans before signing anything. Check their car loan rates and other features so you can have the best deal.

Prepare all the necessary documents

Of course, you need to prove that you have the financial capacity to manage your repayments. Other documents are needed as proof of your identity.

Talk to your chosen broker

You can either call them or send your application online. They will assess if you’re eligible for a car loan and recommend the best options for you. They will then help you in setting up the pre-approval to the right lender.

Features of a Pre-approved Car Loan

Here are some of the features to consider when applying for a pre-approved car loan:

Fixed or variable interest rates

If you choose a fixed interest rate, your repayments will be the same every month throughout the duration of the loan. On the other hand, you can take advantage of the flexibility being offered by a car loan with variable interest rates.

Longer loan terms

Car loans with a fixed rate can have a maximum loan term of five years, but there are loan terms that can reach seven years, making repayments more manageable.

Several payment options

Lenders offer different payment options but in general, you can choose from weekly, fortnightly or monthly repayments, depending on what’s manageable for you. You can also use a car loan calculator to give you estimates of your repayments depending on the payment frequency.

Do you have other ideas on car loan comparison and car loan rates? Share your tips in the comments section.

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