A balloon payment is a one-off lump sum that you pay to the lender at the end of your car loan’s term. Balloon payments are more common with car loans for businesses and are a great way to help reduce your monthly repayments and free up cash. However, there are a number of advantages and disadvantages that you need to weigh up before deciding to go down the path of a loan product with a balloon payment.
The most obvious reason to make a balloon payment at the end of the loan term is so you can free up cash with lower payments over the life of the loan. For businesses, this can be important as the funds can be used in other areas to help you grow your business. If you’re able to save on the upfront costs and delay some of those costs, you could potentially be in a stronger financial position in the long run.
Keep the car new
One of the other key reasons you might consider this type of loan product is that it allows you to sell the vehicle at the end of the lease term to make the balloon payment. You’re then able to go and take out another loan to purchase a new car in the same fashion. The allows you to keep the car new which can reduce the cost of servicing and maintenance as the car is generally going to be under the manufacturer’s warranty. You’ll also be able to have a more technologically advanced vehicle.
Higher overall cost
Generally speaking, if you’re using a loan product with a balloon payment, the overall cost of the loan in the long term is likely going to be higher. This might be OK if you’re putting the funds to better use in the short term, however if you’re not, this type of loan can become a hindrance.
It’s hard to predict what the value of the vehicle might be when the term of the loan ends. If a car has depreciated in value by more than expected, you might find yourself in a situation where you need to pay back more than the value of the car. This large payment could catch you unaware if you’re not prepared for it.
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