What is a Car Loan Balloon Payment?
Whether you’re shopping for your first set of wheels, upgrading an old favourite, or both, a vehicle loan may be part of the equation.
Balloon payment car loans are just one of the many vehicle loan alternatives offered by lenders nowadays, intended to assist you to get on the road without having to spend all of your money upfront.
What exactly does the phrase “balloon payment” imply? This article will address all of the fundamentals of balloon payment vehicle loans and help you decide whether it’s appropriate for you.
What Is a Balloon Payment?
A balloon payment, also known as residual value, is a set amount paid to your vehicle loan lender at the conclusion of the car loan term.
A balloon payment is a proportion of the total loan amount paid at the end of the term, with the aim of making frequent payments more reasonable each month or fortnight when compared to if repayments were calculated on the whole loan quantity.
Balloon payments are generally a large portion of your vehicle loan amount, ranging from 10% to 50%, providing lenders with the ability to significantly lower your monthly repayments. The percentage of the overall loan amount that the balloon payment comprises will usually be negotiated by lenders.
What Happens When the Balloon Payment Is Due?
After you’ve set up your financing, there are a few alternatives available if you need to pay your agreed-upon balloon sum.
If you’re keeping your car, there are a few things to consider. You can pay the balloon payment, finish the loan, and keep your vehicle if it’s too hard to say goodbye and you want to keep it. It might be paid in cash or, if authorized, refinanced into another loan.
If you’re looking to get a new car, consider selling your present vehicle and using the money from the sale to pay off the balloon payment and finish your loan. You may then acquire a replacement car and seek for a fresh loan to finance it.
The Advantages of Balloon Payments
The most important advantage of balloon payment automobile loans is that you will pay less in monthly car loan payments over the life of the loan.
This can reduce the upfront cost of purchasing a car, without sacrificing safety features. For everyday Aussies, this may increase affordability while maintaining safety add-ons.
The Disadvantages of Balloon Payments
Balloon payment auto loans are known to cause your loan to be more expensive in the long run. This is due to the fact that it is meant to explode like a balloon, resulting in you paying more interest overall throughout the duration of the loan.
Because of this, if you are trading off lower weekly repayments for higher rates of interest, you may pay a smaller amount each week yet interest will be charged on a larger amount of money. The same logic applies if the balloon auto loan instalments are made every two weeks or once a month.
What Are the Key Factors to Consider?
When it comes to balloon payment auto loans, you should think about the sort of automobile you want to buy, your individual circumstances, and whether the balloon payment amount you’re most comfortable with at the end of the loan term is a fixed or variable rate.