If you’re thinking about taking out a balloon payment car loan, there are a few things you should know first. We’ve made a handy guide to the ins and outs of balloon payments, so if you’re looking at getting this type of car loan, read on!
What is a balloon payment loan?
So, what is a balloon payment? A balloon payment loan is a type of auto loan where you make smaller monthly payments for a set period of time (usually 3-5 years), and then one final, larger “balloon” payment to pay off the rest of the loan.
What are the benefits of a balloon payment loan?
There are a few benefits to taking out a balloon payment loan:
1. Lower monthly payments
Since you’re only paying a portion of the loan each month, your monthly payments will be lower than if you took out a traditional auto loan.
2. The ability to buy a more expensive car
With a balloon loan, you can finance a more expensive car than you might be able to afford with a traditional loan.
3. Potentially lower interest rates
Balloon loans often come with lower interest rates than traditional auto loans, so you could save money in the long run.
What are the risks of a balloon payment loan?
It’s also important to keep in mind that there are a few risks to taking out a balloon payment loan:
1. You could end up owing more than the car is worth
If you’re making smaller monthly payments, there’s a chance that you could end up owing more on the loan than the car is actually worth. This is especially true if the value of the car drops over time.
2. You could have trouble making the final payment
If you’re not careful, you could end up in a situation where you can’t afford to make the final balloon payment. This could lead to defaulting on the loan, which would damage your credit score and could result in the repossession of your car.
3. You might find it harder to qualify for a traditional loan later on
If you’re thinking about trading in or selling your car after the balloon payment is due, keep in mind that you might not qualify for a traditional auto loan at that point. This is because traditional lenders typically require a down payment, and if you still owe money on the balloon loan, you might not have enough equity to qualify.
As you can see, there are both benefits and risks to taking out a balloon payment car loan. Be sure to do your research and talk to a financial advisor before making any decisions.
