A balloon payment auto loan is a great idea if you are looking for low payments and interest right now, but plan on a lump sum infusion of capital down the road. Balloon payment loans are loans that offer an agreed upon low monthly payment for a set number of years (normally 3 to 5 year terms) and are then followed by a large lump sum payment at the end of the predetermined term. The positive aspects of balloon payment loans are low initial interest rates, low monthly payments and little to no down payment requirement. However, it is necessary to either plan on refinancing at the end of the pre-payment term or to be expecting a large capital infusion at some point in the future, so that the balance of the loan can be paid at the appropriate time or when the “balloon” payment is due.
Balloon loan rates are generally lower than other types of loans as they are a type of adjustable rate loan. When attempting to qualify for this type of loan, the requirements are a bit different than when looking at other types of auto loans. As with any loan, your credit will be examined to determine your capability of making repayment on loans, however the requirements for balloon payment auto loans are much more lax. These types of auto loans will normally be more fitting for those with less than perfect credit scores or no credit at all.
The loan officer will no doubt ask for evidence of your financial ability to repay the loan, however thus you will need to have a steady income, evidenced by at least six months’ worth of pay stubs. In addition, you are generally required to have a certain level (lender determined and based on loan amount) of liquid assets such as investments, cash and bonds. Evidence of this can be provided via bank statements and investment notes. Also, due to the nature of the loan, there needs to be a reasonable guarantee that you will be able to make the balloon payment whenever it does come due. Lenders have varying ways of assuring this, but some common methods are to provide evidence of a large estate sale pending or to present a business plan indicating a start up on the horizon. In general, for balloon payment auto loans, the financial requirements are less than those for other types of balloon payment loans.
The balloon rider loan will be explained at the end of your loan documents and should be outlined by your loan officer. Essentially, your initial payment financing will be at a certain rate for a given number of years, followed by a large payment for the remainder of the loan upon maturation.