Balloon payment auto loans may be right for you, but before you sign for one, you should understand how they work. By reading this guide, you will learn how they function, and you’ll also find out how they can help you. You’ll also learn how to get a car loan payment that you can actually afford.
Balloon payment car loans are ideal for those who are looking for a lower monthly payment. They are structured so that the payments aren’t enough to satisfy the loan—rather, there is a final, much larger payment that must be made. Up until that time, all the payments are applied to the interest only. That means that even with on-time payments, the buyer has little to no equity in the car until the balloon payment is completed. This alone makes balloon payment auto loans a risky proposition for almost everyone.
Many people opt to make the balloon payment by taking out a refinance loan. Most that use a balloon payment loan are strapped for cash and have few other car loan options, and are banking on the improvement of their financial situation in the future, and still others choose to sell the car before the loan is up, paying the loan with the proceeds.
To get a balloon loan, you need to have proof of income and proof of a stable job. You also need to have a decent credit rating, although some lenders are more flexible than others. The biggest requirement is that the buyer is fully aware of the loan’s terms and conditions, and that they understand the pros and cons of this type of loan.
Disadvantages of Balloon Payment Auto Loans
There’s no guarantee that you’ll be in better financial straits in a couple of years, no matter how optimistic you are. You need to have a plan in place, just in case you can’t refinance your car at a better interest rate. How will you pay the loan, because like it or not, you’ll still have to pay that balloon payment. Those who take out balloon payment auto loans are running the risk of losing their car and damaging their credit.
Since you are only paying interest on the loan amount until the end of the loan period, you will probably end up being “upside down,” that is, you’ll owe more than the car is worth. That can make it a lot harder to sell the car at a sufficient amount to pay the balloon payment, or to get refinanced.
Even if you are short on cash, you should approach balloon payment auto loans carefully. Before you sign, consider how much the car is worth now, and also how much you think it will be worth in two or three years when the balloon payment comes due. Also, how much are you willing to give up in order to have that shiny new car? In a lot of instances, a balloon payment loan is more trouble than it’s worth, and all it does is allow you to get into a car loan that you can’t afford to pay.